FLITTSkills: Strategic Planning for Market Entry - Study Materials

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Chapter 1: Strategic Planning for Market Entry - Study Materials

Slide 1: Introduction to Market Entry Strategies

Trading entry strategies are:

Direct exporting: Selling goods or services to a foreign buyer

Indirect exporting: Selling to a domestic intermediary or a foreign intermediary resident in the company’s country

Investing entry strategies can be transfer-related or foreign direct investment related.

Transfer-related strategies are:

Licensing: Giving a company in the target market permission to manufacture a product in return for payment

Franchising: Giving a foreign company in the target market permission to conduct business under a trademarked name in return for payment

Subcontracting: Outsourcing contracted work to a third party company in the foreign market

Loosely coupled strategic alliances: Forming a partnership with an international company

Foreign direct investment strategies are:

Opening of a branch office

Joint venture: Partnering with a foreign company to form a legally separate organization

Greenfield investment: Building production sites or company facilities

Merger or acquisition: Joining with or purchasing another company

Slide 2: Strategic Planning for Market Entry

Slide 3: Step 1: Perform an Internal Analysis

What are the strategic objectives for entering a market?

To maximize profits

To increase market share

To maximize cash flow

To reposition the business

To acquire resources

Questions companies must ask:

Is the product or service suitable for trading internationally?

Do company employees have sufficient knowledge of international trade, including import and export regulations?

Are there sufficient resources to support market entry? Resources can include additional employees, production facilities and finances.

What are our strengths and weaknesses? Internal strengths and weakness can be linked to external opportunities

and threats by performing a SWOT analysis.

SWOT Analysis Matrix

SWOT analysisStrengths-S

List strengths

Weaknesses-W

List weaknesses

Opportunities-O

List opportunities

SO strategies

These strategies will pursue opportunities that match the company’s strengths.

WO strategies

These strategies will overcome weaknesses to pursue opportunities

Threats-T

List threats

ST strategies

These strategies will aim to use the company’s strengths to overcome threats.

WT strategies

These strategies will aim to minimize weaknesses and defend against threats.

Slide 4: Step 2: Identify Potential Markets

Companies should identify one or more potential markets based on strategic objectives. For example:

Strategic objective to maximize profit: Market is large and has strong customer demand

Strategic objective to gain market share: Product is new to the market or there are few competitors

Strategic objective to improve cash flow: Market is relatively undeveloped and customers are appreciative of foreign goods

Strategic objective to reposition the business: Customers are not familiar with the existing business

Strategic objective to acquire resources: Market contains the skills and resources required

Researching countries and customers: Small companies usually conduct a substantial amount of research using the Internet.

Free and reliable sites:

CIA World Factbook

Foreign government websites

Trade association websites

Sites that charge for information or require a subscription:

Information databases

Market research companies

Government agencies, such as the U.S. Department of Commerce and Department of Foreign Affairs and International Trade Canada

Companies can also obtain invaluable information about foreign markets by attending trade shows or trade fairs. Trade visits are also a valuable way of determining whether a market is a suitable one to try and enter.

Activity: Report

The CIA World Factbook is an invaluable resource for companies starting to investigate markets. Go to the CIA World Factbook site:

www.cia.gov/library/publications/the-world-factbook/index.html

Select one country and use the information on the site to prepare a short report containing the following information:

The usefulness of the information on the site.

What you learned about market conditions in the country.

What additional information you would need to determine whether a market was a suitable one for a company to enter.

Post your report to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

Slide 5: Step 3: Consider Potential Issues

Companies must try to anticipate potential issues that might affect market entry

Level of competition in a target market

Market entry barriers

Researching competitive market entry strategies: Companies must analyze the industry, the market and its competitive environment.

Michael Porter identified a framework of five forces that can be used to formulate a competitive strategy:

Information about competing companies can be obtained by:

Having discussions with suppliers and business contacts

Attending trade shows

Reading trade news

Looking at the companies’ websites or annual reports

Obtaining company reports from a provider such as Dun and Bradstreet

Researching barriers to entry

Other potential issues involved with market entry include:

Problems associated with distribution or transport of goods

Political and regulatory barriers, such as the requirement for export licenses or the existence of trade sanctions

Problems involved with obtaining payments from foreign markets

Costs associated with customs tariffs and insurance.

Analyzing risks and benefits

A useful strategic planning exercise for market entry is to conduct a risk-benefit analysis.

Companies must list as many risks and threats as possible. When all risks have been identified, the company assigns values to them for the likelihood of the risk or threat occurring and for the impact on the company if it does occur. Each potential risk factor or threat can then be assigned to a position on a matrix to give a balanced view of its importance to the company.

Risk Analysis Matrix

Likelihood

Impact

1 2 3 4

1Most serious and most likely to occur

2

3

4 Least serious and least likely to occur

In the same manner, companies should estimate the benefits that a proposed course of action might bring and the likelihood of achieving those benefits. For each of these benefits, a company should estimate the likelihood of obtaining this benefit and the impact on the company. The benefit analysis can be used to map out another matrix. Each market can then be compared in terms of risks and benefits.

Activity: Think About It

To conduct a risk analysis, companies must try and identify all possible and realistic risks associated with a market.

Using the CIA World Factbook information you gathered for report, list all the possible risks associated with your chosen country that you can think of.

Post your responses to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

These activities should take you about three hours to complete.

Slide 6: Step 4: Create an Action Plan

The final area of strategic planning for market entry is to decide which actions will be taken and when.

Companies must decide on the market entry strategy that will be most likely to succeed for their given market and list the steps that must be performed to put this strategy into action.

Slide 7: Summary

Successful market entry depends on careful planning of the where, when and how of market entry.

Markets must be chosen carefully.

Companies must also select a mode of market entry that will best match their strategic objectives.

Methods of market entry include those based on trading and those based on investment:

Direct exporting

Indirect exporting

Licensing

Franchising

Subcontracting

Loosely coupled strategic alliances

Opening of branch offices

Joint ventures (cooperative and equity)

Greenfield investments

Subsidiaries

Mergers and acquisitions

Strategic planning enables a company to match entry strategies to corporate objectives, resources and capabilities.

Activity: Case Study

Now that you’re familiar with the subject matter of this chapter, please read the following case study.

Slide 8: Exercises

Exercises

Exercise 1

Each company will have different strategic objectives for entering markets. Based on the information in this chapter, what type of market should the following companies consider moving into?

An electronics company that wants to gain market share

A cleaning products manufacturer that wants to improve cash flow

A travel services company that wants to acquire resources

If you work in a company that has ideas about a market to enter, discuss whether this market will meet its strategic objectives.

Exercise 2

SWOT stands for strengths, weaknesses, opportunities and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors. Choose a well-known company and a potential market that the company might enter and prepare a basic SWOT analysis, by conducting

basic Internet research if necessary.

Develop an idea for at least one strategy for each of the SWOT strategy categories:

Strength/Opportunity

Weaknesses/Opportunity

Strength/Threats

Weaknesses/Threats

If you work for or own a company, you can prepare the SWOT analysis for your company instead of a well-known one.

Post your responses to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

These activities should take you about one hour to complete.

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Chapter 2: Barriers to Entry - Study Materials

Slide 1: Types of Entry Barrier

Sources of entry barriers (as identified by Michael Porter):

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Government policies

These sources can generate a wide range of market entry barriers that can be divided into the following types:

Political and legal barriers, such as sanctions, tariffs, political instability and industrial standards

Customer barriers, such as product loyalty and language issues

Environmental barriers, such as inefficient transportation networks and climate problems

Economic barriers, such as unfavourable exchange rates, sunk costs and high development costs

Business infrastructure barriers, such as lack of business infrastructure and existence of monopolies


Some of the sources of market entry barriers are obvious, such as government policies. However, others are not so obvious. How might economies of scale generate entry barriers to markets?

Post your ideas on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

This activity should take you about 20 minutes to complete.

Slide 2: Political and Legal Barriers

The first thing a company must check is whether there are legal barriers to trade with another country or trade in a particular product or service.

Trade and economic sanctions

Governments use sanctions as penalties or tools to try and influence the behaviour of other nations’ governments. There are two types of sanctions:

Trade sanctions: Trade penalties applied against nations in order to persuade them to change their behaviour or penalties. They include import or export licenses, higher rates of duties on imported goods and import quotas.

Economic sanctions: Measures that prohibit or severely limit trade with another nation. They include import or export bans and embargos.

Strategies to consider

When confronted with this type of barrier, companies can consider the following strategies:

Select a different market to trade with.

Develop alternative goods or services to trade.

Customs tariffs and additional taxes

Tariffs, or duties, are taxes imposed on goods at the point of entry into a foreign country. They act as a barrier because they raise the price of imported goods. Countries also apply additional taxes to imported goods. Different countries have varying tax regimes.


If customs tariffs and other taxes form a barrier to market entry, companies can consider the following strategies:

Develop value-added activities in the target market, such as after sales service, that are not subject to tariffs and that will enhance the value of a more expensive product.

Start producing goods in the target market to avoid the need for importing.

Partner with a company in the target market that will produce the goods at their facilities.

Activity: Report

Import quotas and tariff rates are very important entry barriers to be aware of. The existence of these barriers in a target market can be researched easily using the internet.

Go to the following website:

www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm

Select one of the countries listed as being a member of the WTO. If you work for a company moving into international trade, select a country that is a target market.

Scroll down to the Disputes section for your chosen market. Select an interesting dispute regarding an import and read about it.

Prepare a short report about the import dispute for that nation. Post your report to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Import and tariff quotas

An import quota is a defined limit of a foreign good that can be brought into a country in any one year.

There are two main types of import quota:

Absolute quotas limit the amount of a product that can be imported during a specified time.

Tariff-rate quotas permit a certain amount of a restricted good to be imported at a reduced or normal rate of duty. Any amount over the quota has raised duties applied to it, making it far more expensive.


If import quotas will be a market entry barrier, companies can consider the following strategies:

Export to a different market.

Develop products to export that will not be the subject of quotas.

Produce goods in the target market to avoid having to import.

Slide 3: Political and Legal Barriers (Cont'd)

Government subsidies

Governments subsidize the production costs of some domestic industries so that they can offer their products at a lower price and compete more effectively against cheap imports.


If your company will be affected by subsidies in a foreign market, consider the following strategies:

Develop value-added activities in the target market to increase its attractiveness to foreign purchasers

Adapt the product to give it more appeal and justify the enhanced price

Set up facilities in the target market to obtain subsidies for domestic companies

Buy out or partner with a domestic producer of a competing product

Trade blocs

Trade blocs are intergovernmental associations that promote trade activities in certain areas of the world. There are various levels:

Preferential Trading Arrangement (PTA): These are agreements that involve preferential trading conditions between member countries relative to the trading conditions imposed on non-members.

Free Trade Area (FTA): NAFTA is a regional PTA. Member countries apply no tariffs to imported goods from other members.

Common market: There is unrestricted movement of goods between member countries.

Economic union: A common market with joint economic as well as trade policies.


If your company will face a disadvantage in a chosen market because it is not part of a trade bloc, consider the following strategies:

Partner with a company in a preferred trading relationship with the chosen market or in the chosen market.

Set up a subsidiary company in the market or one that has a preferred trading relationship.

Invest in production facilities in the chosen market to avoid the need for exporting.

Adapt your product or service to enhance its perceived value and justify the increased price.

Political instability

Frequent changes in government, accompanied by reversals in policy, can undermine business confidence and make it more difficult for companies to obtain funding.

Major U.S. Economic Sanctions:


If research indicates that a chosen market is politically unstable, companies can consider the following strategies:

Enter the market for a short-term venture only.

Limit exposure by not locating facilities or employees in the country.

Request cash or an irrevocable confirmed letter of credit up front before delivering goods or services.

Regulatory standards

Because different governments have different standards, they can act as a barrier to market entry. In some cases, the barrier occurs because of differing systems.

Companies wishing to enter a market should ensure that their products meet all required standards.

Foreign direct investment policies

Governments in different countries have varying policies about foreign investment in their nations’ industries and infrastructure.

Companies that are considering an investment strategy for a particular foreign market must research government policies carefully and consult with a trade lawyer for advice on FDI legislation.

Industrial policies

In many countries, governments use industrial policies to restrict and control new entrants’ profit margins and level of competition. These policies include:

Competition law (known as antitrust law in the U.S.)

Licenses and registration

Categorization of industries

Companies must check that a target market permits foreign companies to enter and conduct business and that the policies governing trade will not limit actions or reduce profits.

Government efficiency and corruption

The way in which a country's government operates can also act as a market entry barrier. Efficient governments are easier for foreign companies to work with. Countries run by corrupt governments can present market entry barriers in the form of excess legislation and the expectation of bribes.

Companies must carefully research how the government in a target market functions. If research identifies that a government is inefficient and corrupt, a company must carefully consider whether the other advantages of the market will outweigh this serious entry barrier.

Slide 4: Customer Barriers

Companies entering a new market also face barriers related to customer expectations, preferences, and cultures. Some products and services will not transfer successfully to other markets because different cultures have different aesthetic tastes, lifestyles, or religious views.

Companies must usually consider altering their product or service in some way so that it will appeal to customers in a target market.

Product familiarity

Another entry barrier associated with customers is their familiarity with companies and products already in the market. This might be coupled with suspicion or dislike of foreign goods, or with an inclination to purchase domestic products wherever possible.

A good strategy is often to position the product or company as a domestic one.

Linguistic differences

Linguistic differences represent a significant challenge in international trade.


To counter customer barriers, companies should:

Attempt to gain the best possible understanding of the consumers in its target market

Consider the best ways in which to adapt their products or services

Partner with a local company

Slide 5: Environmental Barriers

Shipping to foreign countries also presents entry barriers in the form of long distances, inefficient or expensive logistical networks, and climate-related issues.

Industrial linkage problems

Companies should research whether the following barriers are present in a target market:

Long distances, which increase the cost of transportation

Absence of reliable or safe transportation

A lack of infrastructure

Absence of efficient links to other industries

Absence of an efficient telecommunications network and expensive or intermittently functioning utilities

Low manufacturing concentration

Low concentration of support industries in the market

Climate

Countries affected by extremes of temperature, high winds, rainy seasons, dryness or humidity require alterations in design and packaging to withstand the effects of climate.

Environmental legislation

Each market has different environmental protection laws and regulations that regulate emissions of chemicals, land use, energy consumption, trade in endangered species, transportation of hazardous goods, and waste disposal practices.

Slide 6: Economic Barriers

Companies should investigate whether a market presents the following economic barriers:

Sunk costs (expenses necessarily incurred to enter a new market that cannot be recouped if the market entry fails)

Economic uncertainty can be a practical barrier to market entry

Fluctuating currency

High inflation

Restrictions on the flow of currency

High market wage rates

High land costs

High construction costs

High costs for raw materials and resources

Restrictions on repatriation of earnings

High corporate income tax rates


Companies can consider the following strategies to deal with economic barriers:

Find ways to cut costs in order to gain a foothold

Reposition a product or service as a luxury item

Target to an affluent subsection of the market

Specify payment in more stable currencies

Use hedging techniques

Demand payment in advance

Slide 7: Business Infrastructure

Companies entering new markets might face problems or increased costs because of the business environment and the way in which companies operate. The business environment can also present the following barriers:

A monopoly, which occurs when one company is the main provider of a product or service in a market

Poor legal protection of intellectual property (copyrights, patents, trademarks) and fair and effective dispute settlement mechanisms

Bribery and corruption


To respond to business environment market entry barriers, companies can:

Partner with local business people who do understand the system and can work it to commercial advantage.

Differentiate their product or service from that provided by a monopoly

Limit their exposure in countries that lack legal safeguards, especially when they have valuable intellectual property

Activity: Test Your Knowledge

Question 1: What is another name for competition law?

a. Antitrust law

b. Monopolies law

c. Tariff law

d. Subsidies lawQuestion 2: What are the two main types of import tariff?

a. Fixed-rate and variable

b. Fixed-rate and absolute

c. Absolute and variable

d. Absolute and tariff-rate

Answers: A, D

Slide 8: Sources of Information

There are many ways in which companies can obtain information about the barriers they will face in a prospective market:

Consulting their government’s Department of Trade

Consulting their national embassy in the target market

Examining the World Customs Organization’s website

Working with a customs broker or freight forwarder

Consulting international trade associations and trade centres

Using the internet to conduct market research

Obtaining information from a market research company

Obtaining information from banks with branches in the target market

Attending trade shows and trade fairs

Visiting the prospective market

Slide 9: Overcoming Barriers through Partnering

A good approach is to use partnering to help overcome most, if not all, barriers to entry. Local partners can:

Provide insights and useful advice into market dynamics

Serve as representatives and agents

Become business associates or permanent joint-venture partners

Slide 10: Summary

A market entry barrier is any factor that makes a market more expensive or more difficult to enter.

Companies seeking to enter a new market might encounter some or all of the following types of entry barrier:

Political and legal barriers, such as government policies, import tariffs, and sanctions

Customer barriers, such as loyalty to a domestic company

Environmental barriers, such as geographic distances, climate, and presence of natural resources

Economic barriers, such as unfavourable exchange rates

Business infrastructure barriers, such as monopolies and a lack of business infrastructure

Companies must be aware of all the issues that might make market entry more difficult so that they can either select a different market to target or plan a strategy to minimize the barrier’s effect.



Slide 11: Exercises

Exercises

Exercise 1

Select one potential market that a company producing cotton clothing might consider exporting to. Conduct online research and identify the following for your export:

Whether it is restricted

Whether your product will need an export or import license

The rates of duty that will apply and additional taxes

Post your findings on the main discussion forum. Based on your findings, discuss whether the company faces a considerable market entry barrier in your selected market. Consider how much your product’s price in the target market will be affected by your additional expenses.

Exercise 2

A small company might encounter some of the following barriers when entering a new market. For each situation, consider a strategy that the company might consider to minimize the effect of the barrier:

Producers in the target market receive a subsidy enabling them to sell their product at a price ten percent

lower than your company would have to charge.

All products in the target market must have ingredients listed in the foreign language.

Customs clearance in the target market is notoriously slow unless bribes are paid to officials.

The only competitor in the target market has been in business for 25 years.

Post your answers on the main discussion forum.

Exercise 3

Consider how barriers facing a service exporter will differ from those facing a manufacturing exporter. Post your views and comments to the discussion forum.

Exercise 4

A company manufactures solar-powered road construction signs.

In pairs, identify two potential barriers to entry for each of the following countries:

Iceland

Germany

Bermuda

Finland

You can communicate using e-mail, IM, or the online discussion forum.

Post your findings on the main discussion forum.

For each activity, review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

These activities should take you about four hours to complete.

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Chapter 3: Market Entry Strategy Selection - Study Materials

Slide 1: Selecting the Right Market Entry Strategy

With a target market selected, a company must decide how it will deliver its goods or services to potential customers. Different markets and industries will require a different approach.

To select the best strategy, companies must consider:

The markets they have selected

The products or services they wish to sell

Their overall aims for international trade

Market entry considerations

Element to consider

Questions to ask

Company goalsWhat are our objectives for entering this market? Which strategy will best meet these goals?

Size of company

Does our size mean that some strategies might not be possible?

Resources Are there strategies that we cannot use because of lack of resources, such as direct investment?

Product or Service

Which strategy will align best with the product or service we are offering?

RemittanceHow will each strategy impact the price we can obtain for our product and service? For example, will direct importing be so expensive for us that our product will have to be overpriced?

CompetitionWhat is the level of competition in the market? What entry strategy are our competitors using? Which strategy will give us the best competitive edge?

IntermediariesWill we need to work with intermediaries? Are there intermediaries we can use in the market?

ControlHow much control does our company need over activities? For example, direct exporting enables a lot of control, indirect exporting does not.

Investment How much will require investing for market entry?

TimeHow much time is available to enter the market? Do we need a strategy that will provide returns quickly?

RiskWhat level of risk can our company face? Which strategies are the least risky?

FlexibilityHow much flexibility do we need? Can we withdraw from a market quickly if we need to?

Slide 2: Exporting

Exporting is the traditional method for trading internationally. It involves goods produced by a company in one country being delivered to another country and marketed there.

Direct exporting

Direct exporting involves a company selling goods directly to a customer in an international market. The most important types of customer for a company involved in direct exporting include:

Importers

Wholesalers

Distributors

Retailers

Government procurement departments

Consumers

Finding customers

If a company wants to export directly to a selected market, it should contact its country’s embassy in the foreign market and talk to the trade commissioners based there.

A company should make the following checks on potential customers:

Does the business have solid financial backing?

Does the business have a reputation for paying invoices on time?

Does the business have a wide coverage in the target market?

How much stock will the business hold?

Government procurement

Government departments in the target market can be an excellent customer for exporters. All governments put out tenders, or requests for proposals (RFPs) to provide goods and services.

Activity: Find Out More

A good place to start looking for government tenders is on the Internet.

Choose one of the following websites that provide free information about government tenders:

DGmarket (www.dgmarket.com), a service of the Development Gateway Foundation

www.B2Bpointer.com , a service provided by API Online

Search for tenders in your field of industry or intended field of industry.

Post your responses to the following questions on the main discussion forum:

How useful were these sites?

Which markets could you find tenders for?

What was the most interesting tender you found?

Review the responses posted by your colleagues and respond to any that you find interesting.

Companies should answer the following questions before attempting to enter a foreign market using government procurement as an export strategy:

Do we have an offering that is ready to be sold and, ideally, has already been sold commercially?

What is the largest order that we are capable of meeting?

How rapidly could we meet a large order?

What action would we take if a government requested a larger order?

Do we understand all aspects of exporting, including which documentation we will require?

Will our product require export permits?

Is our product restricted to certain countries?

Have we researched government funding cycles in our target market?

Have we identified the competition in the market so that we can challenge them effectively?

How can we adapt our marketing approach to be suitable for government procurement agents?

Business models

Some businesses have an export department that is responsible for exporting activities. Others establish sales offices in the target market. Companies new to direct exporting should start by selling to an intermediary or by contracting an agent.

Advantages and disadvantages of direct exporting

Direct exporting as a market entry strategy has several advantages for a company:

The company controls all its manufacturing processes and the processes are based in the company’s facilities.

A company can withdraw from the market relatively cheaply and easily if it needs to.

Companies can obtain in-depth information about trade in the target market.

Companies should consider the following disadvantages

Companies need to invest significantly in researching market information and preparing marketing strategies. Companies without exporting skills and experience can make expensive errors. Target markets in trade blocs are very difficult to break into with this exporting method. Intermediaries will be representing other companies and cannot be relied on to operate in the best interests of the exporting company. Exporting will be more difficult when the domestic currency is very strong in comparison to the target market’s currency.

Slide 3: When is Direct Exporting a Suitable Strategy?

Conditions for direct exporting

Element to consider

Suitable conditions

Company goals Strategic objectives are to maximize profits or expand market share.

Size of company

Any size of company, although smaller companies might find allocation of suitable resources difficult.

Resources The company must have skills and experience in dealing with exporting and

marketing overseas, or must find partners who can help with it.

Product or Service

Any product or service can be exported, but it must be suitable for the chosen market.

RemittanceThis strategy will only be suitable if the costs that will be added to the purchase price by shipping and insurance costs, storage fees, and duties and taxes will not make the product too expensive.

CompetitionMain competitors must not be operating in a monopoly situation or receiving subsidies, because this can severely impact the possibility of success.

IntermediariesNo intermediaries are required, but importers and distributors will be beneficial customers to find.

ControlThe company requires substantial control over production, marketing, and selling activities.

InvestmentThe company must be able to invest substantial time and money into market research, marketing, selling, and distribution issues.

Time The company can enter the market slowly or rapidly.

RiskThe company must be able to handle risks associated with loss of goods in transit, non-payment for goods sent, and unsuccessful market entry.

FlexibilityCompany wants the ability to exit the market more quickly than would be possible if the company had made a direct investment in the foreign market.

Slide 4: Indirect Exporting

In indirect exporting, a company sells to an intermediary in their own country. This intermediary then sells the goods to the international market. The intermediary takes on the responsibility of organizing paperwork and permits, organizing shipping, and arranging marketing.

An indirect exporter can sell to the following intermediary customers:

Export houses (trading houses or export merchants)

Confirming houses

Foreign companies based in the company’s country (buying offices)

Piggybacking

Companies who want to engage in indirect exporting sometimes use a system called piggybacking. In piggybacking, companies (often termed “riders”) use the skills, experience, or resources of a company that is more experienced in exporting (often termed the “carrier” company).

Countertrade

In countertrade, payments for goods and services are made by deliveries of other goods and services as well as, or in place of, financial payments.

One form of countertrade is counter purchase, also known as buyback. This involves a buyer agreeing to purchase a set quantity of goods on condition that the seller purchases the buyer’s products in return.

Finding customers for indirect exporting

In some cases, the intermediary will contact companies. If a company wants to move into indirect exporting, it can find customers using the following strategies:

By contacting the exporters’ association for their country

By contacting chambers of commerce and trade associations

Advantages and disadvantages of indirect exporting

Indirect exporting: Is the cheapest entry strategy Is flexible Allows all exporting activities to be handled by intermediaries Is low risk Involves loss of control Does not permit market knowledge to be obtained

Slide 5: When is Indirect Exporting a Suitable Strategy?

Conditions for indirect exporting

Element to consider

Suitable conditions

Company goals Strategic objectives are to maximize profits or enhance cash flow.

Size of companyAny size of company, but especially smaller companies that cannot devote human resources to international trade.

Resources The company wants a market entry strategy that does not require special resources.

Product or Service

The product must be in demand in an international market and the company must not want to trade in services.

RemittanceThe company must be happy with the remittance offered by the intermediary company.

Competition The level of competition in the market will not be a concern for the company.

IntermediariesThe company must be willing to deal with reputable trading houses or export merchants. A good working relationship will be required.

ControlThe company does not need to have control over production, marketing, and selling activities. It must also not have an interest in how its product is perceived overseas.

InvestmentThe company can invest in additional production or slight product modification if requested by the trading house or export merchant.

Time The company is ready to trade immediately.

Risk The company does not want to handle substantial risks.

FlexibilityThe company wants to be able to withdraw from the trading relationship relatively quickly.

Slide 6: Licensing

Licensing involves a company (known as the licensor) granting permission to a company in another country to use its intellectual property for a defined time period.

The intellectual property can include:

Patented manufacturing processes

Trademarked products

Copyrights

Technical assistanceAdvantages and disadvantages

Licensing has the following advantages:

It involves minimal set up costs.

It provides regular income.

It enables a company to enter a market that has restrictions on foreign companies.

The licensor company benefits from the licensee company’s local market knowledge.

The company gains a market stronghold very rapidly.

The company’s capital is not tied up in foreign operations.

The company has the option to expand into the market further by investing in the licensee company at a later date.

The company can move into several markets at one time.

Licensing has these disadvantages:

Entry into the target market is limited.

The terms of the license must be monitored over the lifetime of the agreement, and enforcement might become necessary.

The licensee company might use the intellectual property provided to become a competitor company.

Intensive research and planning is required to identify the best licensee and develop a beneficial licensing agreement.

Slide 7: When is Licensing a Suitable Strategy?

Conditions for licensing

Element to consider

Suitable conditions

Company goalsThe strategic objective is to expand market share. The company must not require large profits from international trade.

Size of company

Any size of company.

Resources

The company must be able to devote time and resources to locating licensees, negotiating contracts, and monitoring the licensee. It does not want to, or is not able, to devote substantial monetary resources to international trade.

Product or Service

The product or service must be patented intellectual property and must be in demand in an international market.

RemittanceThe company must be happy with periodic payments based on a percentage of sales by the licensee.

Competition

There should be no competing companies in the market because the product, process, or service is patented. However, the company must be comfortable with the potential for competing companies to steal its intellectual property. The market should ideally have a low level of competition.

IntermediariesThe company must work with a reputable law firm experienced in international trade to negotiate and develop the license agreement.

ControlThe company does not need to have substantial control over production, marketing and selling activities.

InvestmentThe company wants to avoid having to invest substantially in international trade.

Time The company wants to enter a market rapidly.

RiskThe company must be able to deal with the risk of business losses from theft of intellectual property.

FlexibilityThe company must be able to remain in the trading relationship for a set period of time.

Slide 8: Franchising

Franchising is similar to licensing, but instead of intellectual property, the company grants permission to use its name or trademarked goods.

There are two main forms of franchise agreement:

First generation franchise: The company purchasing the franchise obtains permission to use a name or produce goods.

Second generation franchise: The company purchasing the franchise receives a complete business package including instructions and directions on how it must operate, staff training, and advice.

Advantages and disadvantages

Franchising:

Enables a company to establish an international presence rapidly

Enables expansion into multiple markets

Provides local market knowledge

Can result in damaged reputations if franchisees operate in an unethical or illegal manner

Involves a requirement for careful monitoring

Slide 9: When is Franchising a Suitable Strategy?

Conditions for franchising

Element to consider

Suitable conditions

Company goals The strategic objective is to expand market share.

Size of company

Any size of company.

Resources The company must be able to devote time and resources to researching conditions in markets, negotiating contracts, and monitoring franchises.

Product or The product or service must have a brand name or a trademark that will be

Service popular in an international market.

Remittance The company must be happy with periodic payments.

Competition

If other companies are also selling similar franchises in the market, entry will be more difficult. Companies must be comfortable with the possibility of competition in the international marketplace increasing with the growing numbers of franchisees.

IntermediariesThe company must work with a reputable law firm experienced in international trade to negotiate and develop the franchise agreement.

ControlThe company wants to have some control over business activities in international markets. The company must be able to deal with possible loss of reputation caused by franchisee actions.

InvestmentThe company is able to make moderate investments and provide training. In some cases, the company must also be able to provide financial assistance to franchisees.

Time The company wants to enter a market rapidly.

Risk The company must be able to deal with a moderate amount of risk.

FlexibilityThe company must be able to remain in the trading relationship for a set period of time.

Slide 10: Subcontracting

Subcontracting is involves a company providing a foreign manufacturer with raw materials, semi-finished products, components, a design, or the technology to produce goods. The company then purchases these goods from the subcontractor.

There are different levels of subcontracting:

Original Equipment Manufacturer (OEM): A company in a foreign market produces goods to a required design and specification provided by the subcontracting party.

Own Design and Manufacture (ODM): A company in a foreign market designs and manufactures a product for a company.


Subcontracting has the following advantages:

It enables lower-cost production.

There is no real cost to establish the manufacturing process in the target market.

The relationship with the target market is relatively easy to terminate.

The company does not have to obtain a business license to conduct operations.

The company is free to focus on other core competencies.

The products can be produced in the target market, removing the need for transportation over long distances and payment of import duties and taxes.

Products produced by subcontractors are sold under the contracting company’s brand name

Many governments welcome subcontracting arrangements.

The company can benefit from the knowledge and experience of the local manufacturer.

The disadvantages of subcontracting include the following:

Distribution, marketing, and sales must be organized.

Finding suitable subcontractors can be difficult and time consuming.

Subcontractors must be vetted carefully and monitored continuously.

There is the potential for a company’s reputation being damaged if a subcontractor is found to be operating in an unethical manner.

Slide 11: When is Subcontracting a Suitable Strategy?

Conditions for subcontracting

Element to consider

Suitable conditions

Company goalsThe strategic objective is to reduce costs or possibly to acquired access to complementary resources.

Size of company Any size of company.

Resources The company must be able to devote substantial time and resources to locating and verifying subcontractors, negotiating contracts, and monitoring the subcontractor.

Product or Service

Any product or service can be subcontracted.

RemittanceThe company must be able to pay the subcontractor for produced goods before receiving a sales income.

CompetitionThe company must be comfortable with the potential for competing companies to steal its intellectual property. The market should ideally have a low level of competition.

IntermediariesThe company must work with a reputable law firm experienced in international trade to negotiate and develop the subcontracting agreement.

Control The company must have substantial control over production, marketing and

selling activities.

InvestmentThe company wants to avoid having to invest substantially in facilities in a foreign country.

Time The company can enter a market slowly or rapidly.

RiskThe company must be able to deal with the risk of business losses from theft of intellectual property and the risk of reputation damage.

FlexibilityThe company must be able to remain in the trading relationship for a specified period of time.

Slide 12: Strategic Alliances

Another strategy for entering markets is to form a partnership (also known as a strategic alliance) with a local company in the target market.

One way of categorizing partnerships or strategic alliances is to view them on a strategic alliance continuum.


Advantages of partnering include the following:

Companies can sell goods and services at competitive prices.

Companies can benefit from the marketing knowledge and skills of local partners.

Companies can develop a local presence without having to invest in the market.

Problems with cultural and language differences can be avoided.

Requirements for local professional accreditation in order to conduct business activities are met by the partner company.

Partnerships often receive tax benefits from the local government.

Companies can bid for contracts in the local market.

Disadvantages to partnering are:

The reputation of the local partner will have an impact on a company’s reputation.

Partnering requires substantial commitment.

Partners must be selected with great care to avoid potential problems.

Slide 13: Branch Offices

Opening a branch office is a foreign direct investment entry strategy.

It is often used as the first step in a market entry strategy, to:

gain a foothold;

make a company’s presence known, and;

to obtain valuable information about the foreign market. Advantages and disadvantages

Opening a branch office in a target country is a relatively simple way to establish a presence, gather useful intelligence, network, perform product testing, or conduct marketing, before making a more serious commitment of resources.

However, it will incur costs and could present tax or legal problems. Property leases also have to be dealt with.

When is opening a branch office a suitable strategy?

Opening a branch office is a strategy that companies should consider if the following conditions apply:

They want to establish or expand their presence in a target country relatively easily.

They can devote the managerial time required to employ personnel, find and manage offices, and maintain operations.

They can deal with the legal aspects of being liable for civil action taken against the office.

Slide 14: Joint Ventures

Joint ventures are a tightly coupled form of strategic alliance and are also a form of foreign direct investment.

In a joint venture, two or more companies form a strategic relationship with the aim of conducting business in a foreign market.

The partnership forms a separate business entity from the parent companies and is formed for a specific business purpose and for a limited duration.


Joint ventures provide companies with higher sales volumes, greater market penetration, and greater profit potential than any other entry strategy.

Because the amount invested is shared between two or more companies, it reduces the amount each partner must contribute and also limits liability.

There are various disadvantages in setting up a joint venture. Each partner must relinquish some control over the operation, and management decisions must be shared. If one partner wants or need to pull out of the partnership, it can be very difficult to regain any of the funds invested in the venture.

When is a joint venture a suitable strategy?

Joint venture is a strategy that companies should consider if the following conditions apply:

Their objectives are to maximize profits, rapidly expand market share, or diversify their company activities.

They can commit to a long-term investment.

They are comfortable with a moderate amount of risk.

Slide 15: Greenfield Investment

A Greenfield investment involves building everything the company needs from the ground (or green field) up. This can include all facets of the business, from plant construction to marketing and distribution channels.


Greenfield investment is the riskiest and most expensive method for entering a target market.

Companies must be committed to a long-term association with the country they are entering.

Companies must determine the legal, regulatory and tax structure of the market they wish to invest in and determine the level of government approval of foreign investment.

Careful planning is required to establish the best form of investment that can be made.

Profits do not have to be shared, and the company benefits in the following ways:

It has the use of cheaper production facilities

It obtains access to new processes, skills and personnel

It can position itself as a local company

It can expand into new areas of trade and reposition itself

It can gain access to in-depth local marketing skills and knowledge

Slide 16: When is Greenfield Investment a Suitable Strategy?

Conditions for franchising

Element to consider

Suitable conditions

Company goalsThe strategic objectives are to expand market share, maximize profits, reduce costs, acquire new resources or technology, or diversify.

Size of company Any size of company.

Resources The company must have senior management support for the investment. The market and regulations must have been thoroughly researched.

Product or Service

Any product or service is suitable. The product or service might be one that the company is not currently associated with.

Remittance The company needs to make maximum profits from the venture.

Competition Competition levels in the market must be low to moderate.

Intermediaries No intermediaries are required.

Control The company wants total control over activities.

Investment The company must be able to make substantial long-term investments.

Time The company wants to expand market share rapidly.

Risk The company must be able to deal with a high amount of risk.

Flexibility The company must be committed to remaining in the market.

Slide 17: Mergers and Acquisitions

Mergers and acquisitions are also forms of foreign direct investment.

A merger is the ultimate form of partnership, because two companies are joined together.

In an acquisition, one company purchases another. The purchased company becomes part of the buying company.

Companies can use mergers or acquisitions to enter a market in the same manner as they might use other forms of partnership.

Acquisitions are usually faster transactions than mergers and the purchasing company retains all business control rather than sharing it.

However, mergers do not require cash and can often be accomplished without having to pay taxes.


It can be difficult for a company to decide whether to merge with a company in a foreign market or to acquire another company. That decision must be made carefully.

The UK government has prepared a useful guide to mergers and acquisitions for small businesses.

Go to the following site:

www.businesslink.gov.uk/bdotg/action/layer?topicId=1074407579

Read through the sections to find out more about how to expand into a foreign market through these two methods and how to identify possible targets for mergers and acquisitions.

Post any interesting findings on the main discussion forum. Review your colleagues’ postings and reply to any that you find interesting. Please remember to be courteous.

This activity should take you about one hour to complete.

Slide 18: Market Entry Strategies for Services

If a company is a service provider, it has different market entry considerations and issues than companies that want to sell goods overseas.

These characteristics affect the market entry methods that service companies can use:

Selling Consultancy Services

Licensing

Franchising

Branch Offices

Joint Ventures

Hiring a Sales Representative

Slide 19: Gathering Competitive Intelligence

The higher the level of competition in the market, the lower the profits that can be obtained.

Companies should research the competitive environment as carefully as possible when deciding on which strategy will best suit them and use this to develop a series of competitive landscape maps (CLM).

Competitive landscape maps

A competitive landscape map is a simple chart that indicates what is important to consumers in the chosen market. Companies should develop several CLMs: one that compares price and quality, one for other important product or service qualities, one for sales strategy and one for key product differences. On each chart, the company should indicate the position of each main competitor in the market. On analysis, this will indicate competitive gaps – these are the areas that a company can target to gain a competitive advantage.

Research for competitive intelligence

Companies can obtain information about a company’s strategic goals, its marketing strategies and its product and pricing strategies by:

Commissioning a competitor analysis company to investigate the market.Using directories, such as Yahoo’s Business and Economy directory (dir.yahoo.com/business_and_economy) or Hoover’s online (www.hoovers.com).

Checking competitor websites

Reading news articles

Attending trade shows, conferences and seminars

Contacting their country’s embassy in the target markets


Question 1: What is involved with piggybacking?

a. Asking another company to conduct export activities on behalf of your company

b. Using the skills or resources of another company to conduct activities in a foreign market

c. Using the distribution channels of a trading house

d. Paying an intermediary company periodicallyQuestion 2: What does a franchisee receive when it purchases a second generation franchise?

a. It receives the right to sell the franchise to other companies in the market

b. It receives a complete business package and advice

c. It receives the right to adapt the franchise’s products or services

d. It receives the right to sell the franchise to other international markets

Answers: B, B

Slide 20: Summary

A company must decide on the most appropriate strategy to enter a market.

Although direct exporting places the responsibility for selling, distribution and marketing on the exporter, a company can reduce the burden by working with an agent or overseas subsidiary.

Indirect exporting is an easier option for companies, but reduces the level of control they have over their product’s sale.

As well as entry strategies that rely on trading, companies can enter markets though strategies that involve the transfer of resources to a company in the target market. These strategies include

Licensing Franchising Subcontracting Loosely coupled strategic alliances

Companies can also enter a market through a strategy that involves direct investment in the market. These strategies include opening a branch office, forming a joint venture, or Greenfield investments.



Slide 21: Exercises

Exercises

Exercise 1

Exporting is a relatively risk-free market entry strategy when markets have been researched carefully. Why do companies need to consider alternate strategies?

Post your response on the main discussion forum.

Exercise 2

What market entry strategies would be good ones for companies dealing with service provision?


Exercise 3

In June 2008, the US poultry producer Tyson Foods Inc announced that it had agreed a friendly purchase of 51 percent of the Indian food processor Godrej Foods Ltd. The aim of this purchase was to form a joint venture enterprise that would generate US $500 million in annual sales in India using two processing plants located in the country. As part of the terms of the deal, Tyson Foods agreed to help Godrej expand production at its current plants and invest in new facilities to reach other Indian consumers.

Tyson moved into the Indian market in an attempt to recover from domestic losses. The US chicken market was oversupplied and the rising price of grain feed was making chicken production less profitable. However, in India, poultry was becoming one of agriculture’s fastest-growing sectors because of the growth of the middle class there.

Source: Reuters. Deals of the Day – Mergers and Acquisitions. June 30, 2008.

This joint venture was described as a “win-win” situation for both parties. What benefits will Tyson foods gain from this venture? What benefits will Godrej Foods obtain?

Post your responses on the main discussion forum.

Exercise 4

A Canadian hotel chain wishes to expand into Europe. Profits are not as important as market share.

Discuss what strategy the hotel chain should consider. Prepare a case for your strategy and then post it on the main discussion forum.

Exercise 5

Select a well-known company and choose a potential foreign market for this company’s product or service. Based on the contents of this chapter, perform the following tasks:

Analyze each market entry strategy and explain which two will be the most appropriate to select.

Identify three competing firms that might be a challenge to your company in the target market.

Identify competitive gaps in the market that your company’s product or service might be able to fill.

Post your findings on the main discussion forum. Make sure you inform your colleagues of your chosen company and its product or service in your response.

Review your colleagues’ responses and respond to any that you find interesting.

All these activities should take about four hours to complete.

Make sure you review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

Print

Chapter 4: Agents, Distributors and Trading Houses - Study Materials

Slide 1: Agents

Agents represent their clients and solicit business on their behalf.

Many agents specialize in a particular industrial sector or product line in a defined territory, and they represent non-competing clients within this specialty.

As a commercial representative, the agent is often empowered to enter into sales agreements on behalf of the exporter.

Agents do not guarantee to sell goods, nor do they take any responsibility for their shipping or safe arrival at the destination.

In return for their services, agents usually receive a commission on the value of the sales they negotiate.

When should companies use an agent?

Companies should consider finding an agent for a market when they are uncertain of business procedures and market preferences.

Agents are also very useful when language barriers exist.

Use of an agent is recommended when a company cannot work directly with the clients in the target market because of the channel structure, level of customer service expectations, or cultural barriers.

Advantages and disadvantages of using agents

The exporting company receives specialized marketing assistance without incurring other costs or relinquishing control over the transaction.

Sales can be negotiated with reputable foreign buyers without having to travel to the market and without having to employ sales representatives there.

Because the agent is no longer involved once the sale is made, the exporter is in a position to establish direct links to buyers and end-users.

An unsuitable agent can undermine the company’s reputation.

Sales might dry up if the agent is incompetent or focused on the interests of other clients.

Any complaints, or requests for after-sales service, from the buyer will come back directly to the exporter and not to the agent.

Finding an agent

To be effective, an agent must know the market, have extensive contacts, have objectives that are compatible with those of the exporter, and know the product well.

There are several sources companies can use to identify agents in target markets:

Trade associations

Foreign chambers of commerce in their country

Their country’s chamber of commerce in the target market

Local trade specialists

Activity: Report

There are various online search facilities designed to help international businesses find partners to work with. Select one of the following search sites and conduct a search for an agent or distributor in a market of your choice.

www.buyusa.gov

www.esources.co.uk

www.importers.com

www.kompass-intl.com/

Prepare a report for your colleagues, detailing how useful the site was and how much information can be obtained.

Post your report to the main discussion forum. Review and respond to your colleague’s reports.

Please remember to be courteous.


A company looking for an agent should follow this process:

Paying agents

In general, agents take a commission (usually expressed as a percentage) on what they sell. However, that percentage varies according to circumstances.

Slide 2: Distributors

Distributors normally purchase an exporter’s product, maintain an inventory, and then resell to retailers or industrial clients for a profit.

Distributors are also referred to as wholesalers.

When distributors have taken possession of the exported goods they take on functions that the exporting company would otherwise have to perform. Distributors organize the promotion of the products they sell, determine the best selling price for the market, and take care of after-sales services.

Selling to a distributor leads to some loss of control over how a product is marketed, sold, and delivered in the target market.

Companies should work with distributors when the numbers of customers to be reached cannot be managed by an agent and when significant distribution, technical service and support, infrastructure and customer service needs are present.

Finding distributors

Companies can find distributors using similar methods to the ones they would use for finding an agent (obtaining information from trade associations, foreign chambers of commerce in their country, their country’s chamber of commerce in the target market, and local trade specialists).

Another good approach is to find companies that are already successful in the target market.

For the best chances of success, companies should be looking for a distributor with all or most of the following attributes:

In-depth knowledge of the local market

In-depth knowledge of barriers to market entry and strategies for overcoming them

Extensive contacts with downstream buyers

An extensive sales and distribution network

A good business reputation

Extensive marketing experience

Creativity in positioning and selling products

Experience in selling the same types of products as those being exported by the company

A method of operating that is compatible with the business interests and attitudes of the exporting company

Activity: Discuss

There are many characteristics that a company should look for in a potential distributor. Which one do you think is the most important? Why?

Post your ideas on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

This activity should take you about twenty minutes to complete.

Slide 3: Making the Right Choice

Agents and distributors both offer advantages to a direct exporter.

In choosing whether to make an agreement with an agent or with a distributor, companies must consider the nature of their products, the type of business they are in, and their strategic objectives.

Companies should consider the following elements of their direct exporting strategy:

The required amount of control over marketing and pricing in the foreign market. Using a distributor might remove most or all of a company’s control over how its product is marketed and priced unless careful negotiations are conducted.

The need for after-sales service. If a product requires after-sales service, companies will have to negotiate the provision of these services with the distributor or use an agent and bear the responsibility for after-sales service.

The financial situation. Companies will not have to pay distributors to sell their product and will receive all of the proceeds from the sale. Agents are financed by the company and might need advances for expenses.

Storage and delivery of goods. Distributors take on the responsibility for storage and transportation of goods when they have entered the foreign market. With an agent, a company will have to make arrangements for storage and transportation to the customers.

Slide 4: Negotiating with Agents and Distributors

When a company has identified a suitable agent or distributor, it must negotiate and sign a binding agreement.

The written agreement

There are several issues that deserve close attention in any agreement with an agent or distributor:

Territory

Exclusivity

Commissions

Status

Control and motivation

Training

Sales method

Payments

Service and liability

Trading Houses

Trading houses are firms that buy goods from manufacturers specifically to export them.

There are hundreds of trading houses worldwide and companies can work with them for numerous market entry strategies, although they are most likely to be used for indirect exporting.

Other ways in which trading companies can act in a market entry strategy include:

Providing investment funds through their merchant banking operations

Acting as a foreign buyer for direct exporters

Becoming a licensee or franchisee

Becoming a joint venture partner

Slide 5: Indirect Exporting Through Trading Houses

By using the services of a trading house, companies relinquish title to the goods they are exporting before they leave the country. The trading house assumes all responsibility for selling and shipping the goods.

The producer is assured of payment when the trading house signs the contract, and does not need to be concerned with anything else regarding the export transaction.

On the negative side, the manufacturing company has no control or influence over how the product will be positioned, marketed, priced, and delivered. Therefore, the trading house option is not suitable for companies interested in establishing a reputation for their products in a foreign country or in developing market share abroad.


Question 1: What is a trading house?

a. A company that purchases goods to export them

b. A company that advises companies on export procedures

c. A wholesaler

d. A company that stores exported inventory

Question 2: What is a disadvantage of indirect exporting?

a. The company relinquishes title of the sold goods

b. The company must make periodic payments

c. The company cannot determine the selling price of the goods

d. The company must pay for advertising

Question 3: What is another name for a distributor?

a. Wholesaler

b. Agent

c. Trading company

d. Export house

Answers: A, C, A

Slide 6: Summary

Distributors act as customers of the exporting company, but have many benefits for an exporter.

Because distributors are experienced in marketing and selling in their local markets, exporting companies do not have to worry about how to market their products or pay for expensive advertising campaigns.

Distributors will also organize shipping within the local market, further reducing the burden of expense and administration.

However, companies that do not want to relinquish control over how their product is advertised, priced, and sold will probably find that using a distributor is not a good strategy for their exporting activities.

Agents work for an exporting company and strive to make the best possible deals in target markets.

They are helpful when companies are unaware of how to find foreign customers, do not have the resources to research and negotiate with foreign customers, or will have problems adapting to foreign business customs and procedures.

Companies that use indirect exporting as a market entry strategy will often sell to exporting or trading houses.

Slide 7: Exercises

Exercises

Exercise 1

List five differences between agents and distributors in their roles as direct exporting intermediaries.

Exercise 2

For the following five companies, discuss whether using an agent or a distributor will be the best direct exporting strategy.

A manufacturer of high-quality, water-resistant, designer watches designed for divers and surfers. The watches were recently featured in an action movie and have consequently become a “must-have” accessory.

A company that develops and delivers training sessions for call centers. The company wants to break into the Indian market.

A manufacturer of a new mop called The Shark, which has a patented technology for absorbing large particles as it mops, eliminating the need for vacuuming or sweeping hard floors before mopping.

A new, family-owned company that produces hand-blown glass bird feeders.

An electronics company that provides a two-year warranty for all its products.

Post your explanations on the main discussion forum.

Exercise 3

Select a well known company (or your own company). If you wished to export this company’s goods directly, should you consider an agent, a distributor, or both? Why?

What qualities would be the most important ones for your chosen intermediary to have? Post your responses to the main discussion forum.

For all activities, review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Print

Chapter 5: E-commerce - Study Materials

Slide 1: What is e-commerce?

E-commerce, also known as e-business, is the buying and selling of goods or services on the Internet or through other electronic means, such as catalogues provided on CD-ROMs.

Companies can engage in various types of e-commerce operation:

They can set up “virtual storefronts” on websites.

They can use Electronic Data Interchange (EDI).

They can use email for marketing.

They can set up online auctions.

They can set up Electronic Funds Transfer (EFT) operations.

Slide 2: Advantages and Disadvantages of E-commerce

There are many advantages to using e-commerce, especially for smaller companies:

Access to potential customers and partners in many global areas. Ability to track customer preferences and purchasing actions Increased productivity Cheaper costs in establishing international trading relationships Targeted advertising and marketing online Reduced communication costs Improved ability to serve overseas customers Improved relationships with business partners

Reduced transaction costs

However, there are many issues that companies should consider before setting up an e-commerce operation.

Product suitability

Not all products are suitable for e-tailing. The most successful e-tailing companies deal with digital products, music, films, photography, financial and stock trading transactions, and software. Purchases that customers might find embarrassing to make, such as pornography, also sell well on the Internet.

Products that tend to sell less well online are those that involve customer selection based on taste, colour, texture, or feel.


Do you ever purchase goods or services online? If so, what types of goods or services do you purchase? Are there any purchases you would not make online? Why?

Customer acceptance issues

Customer acceptance of e-commerce has not been as widespread as was initially envisioned. Many customers still avoid making purchases online.

Concerns about security and identity theft

Customers are increasingly aware of the possibility of having their credit card and other personal information intercepted online. To deal with this concern, companies should construct their websites with Secure Socket Layer (SSL) encryption and ensure customers are aware that their transactions are conducted on a secure site.

Companies can also offer alternative payment methods so that customers have another option that makes them feel more comfortable with making a purchase online. The three most popular payment alternatives are Bill Me Later, Google Checkout, and PayPal.

Access problems

Different areas of the world have varying rates of internet use. If companies are targeting a market with a low percentage of Internet users, e-commerce will probably not be an effective market entry strategy.

Companies must also consider the demographics of their target audience. Many older customers still tend to find the concept of the Internet intimidating and confusing.

Lack of social interaction

Many customers enjoy the social interactions they obtain when browsing and purchasing in physical stores. Shopping online is impersonal.

Lack of instant gratification

People often make purchases to boost their mood. When they must wait days or weeks for a purchase made online, this incentive disappears.

Shipping issues

Many online stores must ship products considerable distances and the price paid by the customer must include shipping and handling charges.

Legal issues

An essential issue to consider is the problem of legal liability and which jurisdiction will take precedence in a dispute. Companies should check carefully that their e-commerce operation does not violate any laws or regulations in their target markets. In these cases, local law enforcement takes action against the operators of the website.

Tax issues

Companies should consult a lawyer about the tax regulations that will apply to their e-commerce operation.

Security issues

Companies that establish e-commerce operations face many security risks, including the following:

Denial of service attacks: These stop authorised users accessing a company’s website and result in reduced functioning of the website or its complete shutdown.

Unauthorised access to sensitive information: Hackers can obtain intellectual property and alter it, destroy it, or steal it to sell on to a competitor.

Malicious alterations to websites: Hackers have been known to alter website content to negatively impact on a company’s reputation or to direct customers to competing websites when they click on a link.

Theft of customer information: Many cases have arisen where customer credit card details, addresses, and other personal information have been stolen for criminal purposes.

Damage to computer networks: Virus and worm attacks can seriously affect company functioning.

To deal with these risks, companies can establish various levels of security, including using authentication systems, such as usernames and passwords, installing intrusion detection software, and using firewalls.

Viruses, Trojan horses, and worms are malicious software programs designed to damage computers. Attacks by these types of malicious software can have serious consequences, including:

Deletion of company data, or inability to access data

Recording of keystrokes made by an authorised user, enabling theft of passwords and usernames

Hijacking of the computer system

Forwarding viruses to customer and partner computers

Companies must ensure that all computers have firewall and virus protection. Employees should not download unauthorised programs or documents from the internet and not open unexpected attachments in e-mails. Companies should also make multiple backups of essential data and store them on non-Internet connected computers, on discs, or with reputable data storage companies.

Computer and website maintenance issues

Setting up and maintaining a website or other e-commerce operation requires that company personnel are technically competent and experienced. Maintenance of computer systems, upgrades to websites, and dealing with computer and internet problems are time consuming and expensive. If companies do not have staff that can be dedicated to maintaining the computer network, they will need to outsource these jobs.

Activity: Report

Three potential ways in which companies can provide an alternative payment method are Google checkout, Bill Me Later, and PayPal.

Choose one of these methods and research it online. Prepare a short report for your colleagues that includes the following information:

How easy it is to set up this method

Interesting features

Costs to the company using it

Some online companies that use this payment method successfully

Post your report to the online discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Slide 3: Setting Up an E-commerce Website

To start online trading, a company must have a website. Creating a website is not difficult, but a company wishing to trade in foreign markets must take as much care creating its website as it would in building a sales office overseas.

Choosing a domain name

The first step in creating a website is to register a domain name (unique website address). Domain names have two components:

Top level domain: This is the denominator at the end of the address and is often .com

Second level domain: This is the part of the website name preceding the top level domain (such as Google in Google.com)

A company’s first choice should be its registered business name or other trademarked name.

Companies must check whether their desired name or phrase has already been assigned by searching the Universal Whois Search engine (www.uwhois.com).

A company must register a chosen domain name with a domain name registrar.

Organizing hosting

Some companies will have the skills and resources to develop website pages and store them on their own servers. Companies that are not able to host their own website can use a hosting company.

Designing the site

Website design and development is the most crucial aspect of an e-commerce operation.

The content on the site should be laid out clearly and concisely so that users can easily find the information they are searching for. Links to other pages should be clearly signposted.

If possible, the website should be constructed in the language spoken in the targeted market. For countries with more than one official language, such as Canada, two versions of the website should be created.

Activity: Discuss

Think about one website you have visited that you thought had great design and was easy to use. What features of the website did you like the best?

Post your thoughts on the main discussion forum and respond to the ideas posted by your colleagues. This activity should take you about 45 minutes to complete.

Purchasing shopping cart software

To sell online, companies need to add shopping cart software to their websites. Shopping cart programs enable companies to take orders, calculate shipping charges and sales tax based on global rules, and send e-mail notifications to customers.

Setting up a merchant account

Companies that want customers to pay online using their credit cards will need to set up a merchant account with a bank.

Setting up a payment gateway account

After obtaining a merchant account, a company must set up a payment gateway account. This account verifies the credit card information provided by customers and authorizes payment transfers.

Slide 4: Organizing an E-tailing Website

Creating a website to sell products or goods online must be planned as carefully as entering a market using other strategies.

Planning steps for e-commerce setup

Step Action

Step 1: Organize Product Information

Decide which products can be best sold online to the target market.Divide the products that will be sold into categories, such as house wares, garden products, and electronics.Decide which products can be sold as package deals.Determine any special shipping rules.Decide if there will be handling charges for any or all products.Determine special packaging requirements.

Step 2: Prepare Item Information

Photograph items and upload them to the website.Define shipping methods.Activate inventory control software and link to each item.

Step 3: Organize the Online Catalogue

When all items are uploaded, organize them into the categories established in step 1.

Step 4: Set Up Global Rules

Define the rules that apply to all products for applying shipping, handling charges, and tax.

Step 5: Set Up Payment Methods

Set up the payment methods the company has selected and the online merchant account details.

Step 6: Create a Shopping Cart Page

Create a new web page to be the shopping cart page and add a cart component.

Step 7: Create Catalogue Pages

Create catalogue pages and add catalogue components. Specify the shopping cart page link.

Step 8: Publish the Site Publish the website and update catalogue images.

Slide 5: Advertising and Marketing

The most important and inexpensive form of marketing for a website is to obtain a high rank on search engines. Companies can use several strategies to boost their website ranking on search engines:

Create interesting, descriptive page titles.

Write a description and keyword meta tag.

Make sure key words appear in the first paragraph of website content.

Use key words in hyperlinks.

Develop several pages that focus on different key words.

Submit the home page address to regional search engines.

Submit the website to directories to increase link rankings.

Find websites of similar companies and contact them to request reciprocal linking.

Slide 6: Summary

The Internet offers companies a way to expand into international markets or to supplement physical trading.

Many companies now offer some form of e-commerce, but new companies should consider the advantages and disadvantages of selling online before moving into international e-commerce.

Even if companies do not sell their products online, they can still establish some form of e-commerce operation by linking to business partners or customers using EDI or by using electronic payment methods. They can also use the Internet or e-mail to strategically market and advertise their products and services to an international audience.

Slide 7: Exercises

Exercises

Exercise 1

Not all products or services can be sold successfully online. For each of the following companies, review the advantages and disadvantages covered in this chapter, along with issues surrounding set-up of a website, advertising and marketing issues, and then discuss whether they should consider an e-commerce strategy for entering their chosen market.

A Swedish company that wants to sell wooden baby toys to the US

An Indonesian company selling handcrafted furniture to Australia

A UK company offering immigration services to people around the world who wish to emigrate to the UK

A Canadian company selling dried seaweed to restaurants in Europe

A US company selling a wide range of affordable clothing to customers in Canada and Europe

Post your responses on the main discussion forum. Read and respond to your colleagues’ responses.

Exercise 2

If a company dealing in cut price holiday packages wanted to set up an e-commerce operation to sell internationally, what would be the most serious risk or issue? What strategies could the company adopt to deal with this issue?


Exercise 3

Select one product or service that could be offered by a company and develop a paragraph of website content and search terms designed to increase results ranking for the company’s website.

Conduct an Internet search using your selected search terms and describe the results in terms of competing products and companies.

Post details of your chosen product or service and the website content you have developed on the main discussion forum. Add information about the results of your Internet search.

Print

Chapter 6: Strategic Alliances, Licensing and Franchising - Study Materials

Slide 1: What are Strategic Alliances?

Strategic alliances are partnerships between two or more companies. They have the following characteristics:

The partnering companies work together to meet common objectives.

The partnering companies share the advantages and the management of the alliance.

The alliance can be long-term or short-term.

The partnering companies remain independent after the alliance is implemented.

The partnering companies are mutually interdependent, meaning that the actions of one company have an impact on the other.

The partnering companies are often competing ones.

Types of strategic alliance

There are various degrees of association between companies in a strategic alliance, from loosely coupled to tightly coupled. They can also be divided into two main categories of strategic alliance: those that are based on transfer or sharing of resources and those that are based on ownership of capital.

Types of strategic alliance

Based on transfer

(loosely coupled)

Based on investment

(tightly coupled)

Research and development projects

Joint ventures

Purchasing and marketing projects

Mergers

Distribution arrangements

Slide 2: Reasons for Strategic Alliances

Companies decide to form strategic alliances for many reasons:

Gaining access to another company’s knowledge or resources

Entering a market that neither company could enter alone

Developing new products

Forming economies of scale

Enhancing competitiveness

Dividing risks

Setting new standards for technology

Entering new markets

Overcoming the competition in a market

Benefiting from the reputation of an established business partner

Undertaking extremely complex projectsActivity: Discuss

What makes a business alliance a strategic one? This subject was addressed in a paper published by the Ivey Business Journal. A copy of the paper can be downloaded from this website:

www.iveybusinessjournal.com/view_article.asp?intArticle_ID=417

Do you agree with the comments made in this article? Are there other factors that make an alliance strategic?

Post your ideas to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Acquiring new skills and resources

Often, when companies cooperate on a project, they exchange skills that are not for sale. Companies often share their technology instead of selling or leasing it because they believe that they can make more profit from it in the long term if they retain partial ownership. Another reason for sharing technology with a partner company is that the technology might be so new or sophisticated that it is difficult to package for sale or lease.

Forming economies of scale

Companies with complementary skills can rely on each other’s proven expertise instead of spending time and resources to independently develop what has already been achieved.

Enhancing competitiveness

The most competitive corporations are adopting a strategy of maintaining their core competencies only. (Core competencies are areas in which a company has genuine knowledge and ability.) Gaps in the skill bases are then filled by partnering with a company that has the missing skills.

Dividing risks

Risk sharing through partnering is most often seen in research and development areas. Partnering can be used to share risk in other areas as well. For example, companies can share transportation and distribution systems: this saves money and enables faster delivery of the product. Joint marketing is another way of spreading risk and increasing returns.

Setting new standards

Forming alliances is one approach to establish standards in an industry. It also increases the chances that the standards a company invests in will be accepted throughout the industry.

Entering markets

Strategic alliances are effective ways of entering new markets. Partners can provide established marketing and distribution systems, as well as knowledge of the markets they serve. Foreign partners can advise a company on how to modify a product to meet local regulations and market preferences. They can help with such issues as translation of documentation, conversion from metric to Imperial measures, conversion of power requirements, and compliance with packaging regulations.

Overcoming competition

A well-conceived alliance can mean a head start in a market, possibly even preventing other competitors from entering. Forming an alliance with an established, major company can reduce the influence of other companies.

Activity: Report

Companies decide to form strategic alliances for many reasons. Conduct an online search for a business news article about a strategic alliance that has been formed recently.

What were the reasons for this strategic alliance? Might the companies involved have met their objectives more effectively by using a different strategy?

Post your findings and your opinions about the alliance to the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Slide 3: Disadvantages of Strategic Alliances

Although there are numerous advantages to forming strategic alliances, there are also some potential disadvantages. Companies entering partnerships should be aware of these nine major disadvantages and protect themselves against them as much as possible

Loss of freedom: Any partnering arrangement will necessarily impose constraints on a company’s actions. Loss of control: Some kinds of partnerships can involve partial or complete loss of control over a project. Loss of profile: The dominant position of one partner can overshadow the other, leading to a loss of profile or market presence. Damaged reputation: Partners in a relationship are affected by each other’s actions. Loss of intellectual property: Close cooperation between companies offers ample opportunities for unauthorized leaks of proprietary information into the partnering organization. Cultural differences: Differences in corporate or national cultures can negatively impact a partnership. Complexity: Some partnerships can be complex, especially if they involve numerous companies, multi-functional arrangements, or diverse and parallel objectives. Disagreements: Agreements cannot cover every eventuality, and disagreements will arise, especially if the project is high profile, expensive or risky.

Increased management time: Project complexity or frequent disagreements can absorb a considerable amount of energy and attention.

Strategies for dealing with partnering issues

Possible dangers to be avoided

Avoidance strategy

Loss of freedom Define all constraints on action in the partnering agreement.

Loss of control Partner with a similar-sized company.

Loss of profileEnsure distinctive appearance or appropriate public credit for all of the firm’s inputs and contributions.

Loss of reputation Choose the partner carefully.

Leaks of proprietary information

Establish non-disclosure agreements; raise awareness among own employees, and institute rules and procedures for sharing sensitive information.

DisagreementsInclude a dispute-settlement mechanism or arbitration process in the partnering agreement.

Extensive time to establish and

manage the partnership

Keep the relationship simple. Dedicate a manager to the partnership.

Complexity Limit the objectives of the partnership.

Dependence on partner firm

Diversify partnering arrangements to avoid dependence on one partner.

Personal incompatibility

Carefully select and train employees directly involved in the partnership.

Cultural differences

Carefully select and train (including cross- cultural training) employees involved.

Also look for opportunities to exchange personnel for periods of time as a way of exposing them to each other’s environments.

Slide 4: Research and Development Alliances

Research and development strategic alliances are formed for the purpose of developing new products and technologies. Usually, the companies work together on the research side of the project and then develop the products independently.

Purchasing and Marketing Alliances

With the pressures of international trade constantly increasing, companies are becoming aware of the benefits of forming alliances with their suppliers or buyers.

Supplier alliances

By regarding suppliers as partners in their business, and treating them as such, companies can realize the same kind of significant advantages that other partnerships provide. These benefits include the following:

Suppliers can anticipate problems and develop effective strategies for solving them. This enables them to provide a better service for regular customers.

Suppliers begin to see themselves as stakeholders.

Suppliers might be able to offer the trading company important advice on improving internal processes. They might also provide access to their own network of contacts.

By directing business to a particular supplier, the purchasing company might receive discounts for volume, thereby realizing savings and enhancing competitiveness.

A supplier might be more agreeable to easier terms of payment, thereby assuming part of a transaction’s risk and improving the company’s cash flow.

Buyer-seller alliances often use one or more of the following systems to meet their objectives:

Vendor Managed Inventory (VMI)

Just in Time (JIT)

Electronic Data Interchange (EDI)

Vendor Managed Inventory (VMI)

With VMI, the supplier is given access to data about the buyer’s inventory (usually using EDI or by accessing a website). The supplier determines when inventory levels need replenishing and organizes deliveries accordingly. The buyer does not need to place purchase orders. Major purchasers, such as food retailers and department stores, commonly use VMI.

Just in Time (JIT)

A system linked to VMI is Just in Time delivery, or JIT. The concept behind this form of business operation is that inventory is wasteful and expensive. Buyers aim to reduce inventory levels to the minimum possible to maintain customer supplied. Buyers form alliances with suppliers to deliver products or goods rapidly when needed. They also ensure that supplied products are quality tested so that the buyer can minimize inspection of incoming shipments. In return for their commitment to minimizing inventory levels, supplier companies benefit by having an assured amount of product purchased.

EDI

EDI is a system in which both partners use a common system for electronically exchanging data. EDI is often used when alliances operate on a VMI basis.

Partnerships with suppliers of components

Partnerships with suppliers of materials can help exporters spread the cost of entering a market. Suppliers are also increasingly financing international trade transactions. In supplier financing, the supplier agrees to be paid when the exporting company is paid. The supplier charges interest on this loan.

Companies might also partner with suppliers in order to meet deadlines. When large international shipments will require a significant increase in the amount of components a company orders, a Just in Time partnership arrangement can avoid the need to find additional warehouse space.

Companies might need to encourage suppliers to develop a quality assurance program, such as Total Quality Management or ISO: 9001:2000.

Partnerships with suppliers of services

Companies can also form strategic alliances with the following service providers:

Freight forwarders: Many companies use freight forwarders to expedite their shipments abroad.

Business advisors: Business advisors for international trade can include lawyers, accountants, financial intermediaries, management consultants, or political lobbyists.


Vendor managed inventory has become widely used in supplier alliances. One useful website, which details exactly how VMI functions and how a company can set up and run a VMI system is

www.vendormanagedinventory.com/

This site also details how companies can use EDI systems to enhance international trade.Marketing alliances

Marketing alliances, often called co-marketing alliances, are partnerships between companies with complementary products that are aimed at the same market. The partners collaborate in marketing, and sometimes even production of products. This collaboration aims to ensure that one company’s products can work with, or complement, the other partner’s products.

A main challenge with marketing alliances is the inherent level of competition between the partners. They are often producing competing products in the marketplace. Companies must also share proceeds, and there might be disagreement between the partners about positioning or pricing.

A very important consideration for a company thinking about a co-marketing alliance is legal responsibility. Customers in a foreign market purchase a product from the company marketing it. In the event of a claim for damages, both the seller and the producer of the product could be sued.

Slide 5: Distribution Alliances

Strategic alliances with distribution companies can result in significant cost-savings. One common distribution alliance is for partners selling to the same market to join together to purchase bulk-shipping rates or share storage space.

Licensing and Franchising

In a licensing agreement, a company sells the rights to a developed product or service in exchange for a specified fee. The buyer of the technology (the licensee) invests capital to use that product or service in the hopes of selling it in the local market.

As part of the licensing agreement, the licensee usually agrees to a sell the product or service in a defined area, to pay royalties and fees, and to meet sales targets, quality standards, advertising and marketing guidelines and “non-compete” provisions. The licensee can negotiate for sub-licensing arrangements so that it can sell licensing rights on to other companies in the local market.

In return, the licensor will generally agree to grant the licensee exclusivity for the selling area and provide the licensee with technology upgrades. The licensing agreement will determine the term and length of the arrangement and conditions for monitoring and settling disputes.

Issues to consider

The company purchasing the license will take on the expense and risk of production, marketing and distribution in the target market. However, because licensing does not involve a great deal of cooperation between the licensing company and the foreign licensee, companies will often not work together to achieve common objectives. A common problem with licensing is that it results in a competitor in the target market.

To try and avoid licensing problems, companies must ensure that experienced international trade lawyers draw up licensing agreements carefully. They must cover the following issues:

Exclusivity

The scope of the license

The field of use

Quantity

Territory

Sublicenses

Exporting

Confidential information

Trademarks

Training and technical services

Quality control

Monetary paymentsFranchising

Franchising is a specific form of licensing that involves selling the rights to a complete package of trademarks, processes, technologies, designs and copyrights in order to operate a specific business.

The holder of the franchise (the franchisor) brings process technology, a business name or reputation, equipment and support to the business venture.

The buyer of the franchise (franchisee) contributes capital and the effort of setting up and running a business in a new market. The franchisee is given the right to use a certain process or service-delivery mechanism, and is also given access to proven systems, marketing and advertising support, and full use of the trademark.

Companies must be aware of the possible disadvantages associated with franchising:

Few franchises make profits in the first few years

Companies must spend substantial sum on training franchisees in the ways of their business

Companies must also be confident that what works in their local environment will work overseas

A failure can create a negative impression of the franchise brand and prevent further expansion.

Licensing and franchising compared

Licensing Franchising

The licensee usually does not identify itself using the licensing company’s name.

The franchisee uses the franchising company’s name to identify itself.

The licensing company will often not provide business support to the licensee and will only provide training as agreed in the initial contract.

The franchisee receives training, marketing, and other forms of business support from the franchising company on an ongoing basis.

The licensee might deal with a range of products and services as well as the licensed ones.

The franchisee will usually offer only the products and services authorised by the franchising company.

Companies that want to sell franchises should meet the following criteria:

The company is successful in the domestic market and has a tested product or service to export abroad.

The company has selected target markets carefully and carried out research to ensure that the franchise will be suitable and desirable.

The company is willing and able to support the business partners who purchase the franchise.

Issues to consider

Companies must seek legal advice and consider the following issues:


Question 1: What is one difference between licensing and franchising?

a. A licensee will not operate under the licensing company’s name, whereas a franchisee will

b. A licensing company will provide ongoing training and management support, whereas a franchising company will not

c. A licensee will only produce one type of good or deal with one service, whereas a franchisee will produce or deal with many

d. A franchisee pays fees annually, whereas a licensee pays fees monthlyQuestion 2: When is EDI often used?

a. When quality assurance levels must be met

b. When a company is setting up an e-commerce site

c. When internet connection speeds are low

d. When a company wants to work with a partner more effectively

Answers: A, D

Slide 6: Summary

Strategic alliances are an essential component of international trade. Companies should examine all possible ways in which they can form partnerships to reduce their risks and costs and leverage the experience of other companies.

Licensing is a relatively straightforward market entry method for companies that want to get their products or expertise into a foreign market with a minimum level of investment and risk. The company purchasing the license will take on the expense and risk of production, marketing and distribution in the target market. A common problem with licensing is that it results in a competitor in the target market.

A franchise enables companies in the target market to use proven processes, trademarked products, or services for a specified period of time. Franchising is a growing method of international market entry, but companies must be aware of the possible disadvantages associated with it.



Slide 7: Exercises

Exercises

Exercise 1

List five reasons why a small company should consider forming a strategic alliance to enter a new market.

Exercise 2

Strategic alliances aim to provide a win-win situation to all partners. In a case study in this chapter, Omni Lingual formed a partnership with Language Line, a competing company with a larger service offering. The benefits for Omni Lingual were clear. How would you persuade Language Line managers that this was a beneficial move for their company as well?

Exercise 3

What are the dangers in forming an alliance to overcome competition?

Exercise 4

A company has a patented bottling process for soft drinks. It wants to license the process to bottling plants in India. What considerations must be covered in the licensing contract?

Exercise 5

A popular Japanese sushi restaurant sells franchises to UK individuals that set up a chain of franchised restaurants. Growth is rapid and the chain becomes very successful. However, an outbreak of food poisoning is tracked to one of the chain’s outlets and maggots are found infesting the food in the kitchens. Although each franchise is owned by a separate business, the outbreak has a negative impact on all the restaurants because the name becomes associated with maggot infestation.

Post your responses to all these activities on the main discussion forum. Review your colleagues’ responses and

reply to any that you find interesting. Please remember to be courteous.


Print

Chapter 7: Foreign Direct Investments - Study Materials

Slide 1: Foreign Direct Investment

There are several ways in which companies can invest directly in foreign markets:

Construction of facilities or investment in facilities in a foreign market (Greenfield investments)


Investment in a joint venture located in a foreign market

Most foreign direct investment is still made by large companies investing in the construction of facilities abroad.

Reasons for foreign direct investment

Some governments prohibit or limit imports of goods produced in other countries. A company can build a production site in the foreign market and produce locally.

roducing goods in the target market avoids import duties and other taxes and the requirements for import permits.

Companies can obtain the services of skilled employees in the target market or gain intelligence held by people in that market.

Companies can take advantage of lower costs, such as cheaper labour.

Companies can become more competitive.

Investment to gain access to closed markets

Investments are often made in countries as a way of gaining access to markets that are closed or limited by trade barriers, procurement practices, or government regulations.

Key issues to consider are:

How important is the market?

How much investment, and what type of investment, must be made in the country in order to gain access to the market?

What are the ownership requirements for competing successfully?

Investment for intelligence

Companies can also make investments as a way of securing information or intelligence. A company should ask:

Where are the new areas of opportunity?

How is business done?

Who should the company get to know? What contacts are most valuable?

What is the competition doing?

Taking advantage of lower costs

Low factor costs, including inexpensive labour and cheap raw materials, often drive investment decisions, as does innovation, access to technology, and other things that give companies a competitive advantage.

Key questions to consider include:

How important are factor costs?

How important are other considerations such as a well-educated work force capable of innovation?

Can the company achieve cost advantages through automation?

Are pivotal customers and key competitors already present in this market?

What package of factors is important?

Investment to enhance competitiveness

Investments can be made to enhance a competitive position or to anticipate and counter the actions of competitors. Key issues to consider include:

Will the company be first in the market and therefore gain an advantage with the consumer?

Will entering a market cause competitors to react, and possibly derail the firm’s strategy?

Will the firm be able to capture market share at the expense of competitors and will this have an impact beyond the target market?

Will such action reduce competitors’ profits by increasing the level of competition?

Can the firm tie up preferred distribution in the country by making an investment now?

Slide 2: Common Investment Vehicles

The reasons a company has for investing in a foreign market will influence the entry vehicle selected.

Investment vehicles: Comparison of costs and benefits

GreenfieldJointventure

Merger or acquisition

Benefits

Management control

High Medium High/medium

Financial control High Medium High/medium

Political security High Medium/low Low

Adaptability/ flexibility

High Medium High

Knowledge of High Medium Medium/high

market

Costs

Start-up High Medium Medium/high

Capital commitment

High Medium Medium/high

Possible costs of disputes

Low Medium/high Medium

Potential liability Low Medium/low High

Long-term commitment

High Medium/low Medium/high

Slide 3: Greenfield Investments

Greenfield investing is investing in the development of a manufacturing facility, office, or retail site in a foreign market. This market entry strategy represents the most risky and intensive method a company can use to enter a new market.

Companies that establish foreign subsidiaries are usually those with overseas experience and a large capital base.

Reasons for making a Greenfield investment

Reasons for a company to consider entering a market through a Greenfield investment include:

Advantages of Greenfield investment

Greenfield investments have many advantages

They are built to meet exact needs.

They allow a company to build a corporate culture.

The company has 100 percent control over what it does.

There is reduced risk of attendant or unknown liabilities.

The company can adjust and adapt its strategy or operations to meet the needs of the parent company’s strategy.

Drawbacks of Greenfield investments

Greenfield investment is complex, expensive, and risky.

Wholly owned subsidiaries remain favourite targets of those who are suspicious of any form of foreign ownership in an economy.

It takes a long time to establish a plant or office, equip it, and hire personnel. When the process is complete, the company must be committed to that market. It cannot easily leave if conditions change.

Slide 4: Mergers and Acquisitions

In an acquisition, a company purchases the assets and majority ownership of another company.

In a merger, two separate businesses are combined to form another business.

Mergers and acquisitions are both most successful when the companies involved have developed a business relationship.

Acquisition considerations

There are many factors that can make foreign acquisitions more difficult than domestic ones. Companies should consider the following factors carefully:

Capital

Acquisitions usually require cash. Accounting practices vary, the necessary information may be hard to obtain, and valuations often require extensive investigation.

Time

Mergers and acquisitions rely on companies finding the right company to acquire or merge with and are therefore slow to set up.

Legal restrictions

Companies should ensure that they are aware of any possible legal restrictions on the acquisition of certain types of companies in the target market.

Cultural considerations

Cultural deterrents can also make an acquisition very difficult.

Company background

Before moving to merge or acquire with a company, its background, history, financial situation, reputation, and competitiveness must be researched thoroughly.

Environmental risks

A company should ensure there are no unknown or unquantifiable environmental risks and liabilities.

Fact checking

Companies should never take numbers or descriptions at face value.

Developing a relationship

It is important to develop joint objectives, strategies and financial plans that both parties share.

Pricing

The rationale for pricing must be understood. In privatization sales it might not be the same as in sales to private buyers.

Taxation

Proper tax planning can maximize the value of an acquisition for all parties involved.

Advantages and disadvantages of acquisitions

Advantages Disadvantages

Provides quick and efficient access to new markets.

Cumbersome government regulations can slow, stall or curtail a negotiation.

Provides a company with access to a proven work force, operations and systems.

Local companies might have built-in conditions that make it hard to realize efficiency gains.

Enables better use of financial and management resources than could be obtained by building from scratch.

Companies face new and unknown culture and traditions.

Enables company to consolidate core position in an industry.

Unions may feel their power is threatened. It is important to bring in a labour consultant to help write employment contracts, structure pay scales, and hire staff to try and avoid the friction these activities might introduce.

Provides access to valuable proven assets.

Environmental liability might not be fully disclosed, or might not be quantifiable.

Financial liability may not be fully

disclosed.

Takes a long time to plan and complete.

Slide 5: Joint Ventures

A joint venture is a tightly coupled form of strategic alliance, in which two companies make a legal agreement with the aim of designing, manufacturing, managing, marketing and/or distributing a product or service.

Reasons for forming joint ventures

The most common reasons companies form joint ventures are:

Forms of joint venture

There are two main forms of joint venture: unincorporated and incorporated.

Incorporated and unincorporated joint ventures

Incorporated Unincorporated

Each partner’s liability is limited to its investment as a shareholder.

Each partner has joint liability to the full extent of its own assets for the liabilities of the joint venture.

Existence of the company is not affected by the actions of individuals.

The actions of one partner or individual can lead to the dissolution of the joint venture.

Difficult to end the joint venture.

Easier to end than an incorporated joint venture.

A participant can act in its own interests.

Each partner is subject to an absolute duty of good faith in respect of the other parties and cannot act solely in its own

interests.

New partners can joint an existing joint venture.

New partners cannot join an existing joint venture. It must be dissolved first.

Deciding which form to use

In deciding whether to form an incorporated or unincorporated joint venture, companies should assess their needs in relation to the following issues:

Level of risk: With an incorporated joint venture, a partner’s liability for the venture company’s losses is usually limited to the amount invested in shares. This means that risk levels are lower with incorporated joint ventures. Level of privacy: Because an unincorporated joint venture is a private agreement and not the formation of an independent legal entity, it is protected from public scrutiny. Accounting: With an unincorporated joint venture, partners can retain separate accounts. Losses from the venture can therefore be accurately assessed and offset against income for tax purposes. Legislation: Unincorporated joint ventures allow flexibility in company legislation. Financing: Obtaining bank loans will be easier with an incorporated joint venture.

As with other forms of strategic alliance, the creation of a joint venture can have broad implications for competition policy. Two companies deemed to be competitors might be accused of collusion in the marketplace if they form a joint venture, unless the venture is specifically intended to operate in a manner that is distinct from that of the parent companies.

Joint venture considerations

Companies must consider all aspects of the decision to form a joint venture carefully. It must never be seen as an easy way to enter a market. It should only be considered as a possible strategy if a company can find the right partner with complementary skills, resources, needs, and expectations. The foreign partner must know how business is conducted in the local market, have a track record of success, and be able to commit resources to the venture. The proposed joint venture should also have enough potential to sustain levels of investment.

Companies should also ensure that they have considered the following issues:

Control

Valuation

Autonomy

Flexibility and compromise

Continuity

Exit strategy

Record keeping

Accounting practices

Budgeting approvals and financial reporting

Capital investment guidelines and restrictions

Sourcing of raw materials, components and other inputs

Transfer pricing and evaluation of profitability

Reinvestment or dividend pay-out

Legal counsel

Partners’ liability insurance

Composition, roles and responsibilities of the board of directors

Management guidelines: composition, roles and responsibilities

Health and safety guidelines

Environmental guidelines

Human resources practices, including compensation, benefits, and schedules

Public relations and communications

Conflict resolution and dispute settlement

Confidentiality of proprietary information

Clauses covering competition

Exit provisions, such as buy-sell agreementsActivity: Find Out More

Joint venture agreements must be carefully negotiated and drawn up to ensure the success of a joint venture. The following website, provided by the Canada Business Network, details the essential components of a joint venture agreement:

http://www.canadabusiness.ca/servlet/ContentServer?pagename=CBSC_FE/display&c=GuideFactSheet&cid=1081945276925&lang=en

Advantages of a joint venture

Joint ventures have become such a common form of market entry strategy because of their many advantages:

Joint ventures tap into the foreign partner’s knowledge of the local business environment.

They use pre-existing distribution networks.

They avoid buying the problems and liabilities of the local partner (which could happen through acquisition) by buying only expertise and access.

They permit greater flexibility in market entry.

They extend the knowledge and capabilities of both partners.

They permit the partners to approach several markets simultaneously, which the partners could not afford to, or manage to, do individually.

They foster complementary skills, resources and capacity, leading to greater synergy.

Disadvantages of a joint venture

Joint ventures have certain disadvantages:

The choice of personnel assigned to the joint venture may be influenced by how important the partner feels the joint venture is.

The local partner often hires local staff, and their allegiance may subsequently gravitate to the local partner.

Control issues may take precedence over getting the job done, and may lead to failure in a market that would otherwise be very attractive.

The reputation of the firm is tied to the partner’s reputation.

A joint venture carries more legal and financial obligations than do other types of cooperative ventures or alliances.

The costs of exiting (particularly opportunity costs) can be high, unless thoughtful exit provisions have been included in the original agreement.

Slide 6: Summary

Foreign direct investment involves any method in which a company acquires a controlling interest in a company in another market. There are several forms of foreign direct investment:

Construction of facilities or investment in facilities in a foreign market (Greenfield investments)


Investment in a joint venture located in a foreign market



Slide 7: Exercises

Exercises

Exercise 1

There are two main forms of joint venture operation: incorporated and unincorporated. A company wishes to form a joint venture operation, but wants to limit its liability and ensure that its chosen partner company cannot end the joint venture without its agreement. Which form of joint venture should it consider? Explain your reasoning.

Exercise 2

Greenfield investment is a highly risky market entry strategy. When should companies consider it?

Exercise 3

In a case study in this chapter, H.B. Fuller invested in building new facilities in China. Was this the best strategy to meet their strategic objectives? What other strategies might have been suitable?

Exercise 4

What is the main difference between an unincorporated joint venture and a business partnership? Post your responses on the main discussion forum. Read your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

These activities should take you about 40 minutes to complete.

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Chapter 8: Finding the Right Partner - Study Materials

Slide 1: Analysis of Company Resources

When a company wants to find a partner for international trade, it should begin by assessing its own capabilities.

The company must consider its strengths and weaknesses in marketing, new development and production capabilities.

Identification of Gaps

When the company has examined its strengths in the context of its corporate objectives, it should be able to determine what it needs from a partnership.

Service offering

A company should assess the products and services it offers to its customers, from the foreign customer’s point of view.

Human resources

The company should examine the capabilities of employees in the areas of language, knowledge of the target country, and personal contacts there.

Familiarity with the market

The company should evaluate its understanding of the target market to determine whether it is sufficient to launch a successful marketing program.

Process and technology

The company should assess its production processes, technology and methods of operation.

Financing

The company should estimate the financial resources needed to enter the new market to determine whether it can undertake the venture with internal resources.

Slide 2: Defining Desired Partner Characteristics

If gaps that can be filled by a partnership have been identified, a company can use that information to define the characteristics of potential partners.

Some of the key factors to consider in determining a partner’s characteristics include size, capabilities, marketing orientation, strategic objectives, and corporate culture.

Size

The best partnerships are usually those formed between companies of similar sizes. Size can be measured by assets, revenue, number of employees, or other criteria, depending on the nature of the venture.

Capabilities

A company’s capabilities mean its human and physical assets, including the following four key areas:

Technical skills and resources

Management resources

Financial resources

Competitive advantages

Markets served

The prospective partner’s market experience can be considered in terms of the products handled, the clients served, and the regional dimensions of the market.

The products or services offered by the potential partner should be itemized and classified.

The customer base that the company serves is another important factor.

Finally, a company must determine the geographic characteristics of the markets serviced by the potential partner, and the types of distribution employed.

Strategic objectives

Strategic objectives determine what the potential partner will want to get out of the partnership. These might include product diversification, technological advancement, and industry or geographical focus.

Corporate culture

A company’s culture can be evaluated according to a number of criteria:

Is the management style hierarchical or cooperative?

Is authority delegated?

Is the company centralized, or is it divided into profit centres?

What hiring and employee relations policies does it follow?

Is the company a risk-taker or a risk-avoider?

Marketing strategies and capabilities

Marketing expertise can be evaluated by looking at sales data, which will reflect marketing strategy as well as capability.

Slide 3: Determining Whether Companies are Complementary

The right partner for a market entry venture is one who complements a company’s capabilities, and has a compatible business style and approach to the venture. Complementary skills are not enough. The prospective partner organization must also have the ability to interact effectively with the company.

Characteristics

Size, organizational structure, management style, operating policies, and philosophy are very important characteristics.

Ideally, the partnering companies should be of a similar size. If they are not, special provisions may be necessary to prevent the larger partner from dominating the relationship.

The marketing capabilities, experience and strategies of the potential partner should be appropriate to the product. They should be similar to the company’s marketing capabilities, except that they should relate to the target market.

Ideally, corporate cultures should be closely matched. The fundamental values that underlie each company’s business approach must be reasonably similar if the partnership is to succeed.

Attitudes

Each company should be able to cooperate easily and effectively with the other.

It is also important to understand what a potential partner wants from the relationship. Are the goals of both companies compatible?

It is also important to determine how critical the proposed venture is to the partner’s long-term business strategy and the level of the potential partner’s commitment and trustworthiness.

Operations

Operating an international business involves tackling many logistical problems. Marketing, order fulfillment, and after-sales services and collection must be coordinated.

Some market entry strategies, such as joint ventures and mergers, require closer collaboration between partners than others, such as direct exporting. For these intensive business relationships, companies should also assess the following:

How much cooperation will be required between the partners?

Do differences in size, structures, and objectives between the companies in the partnership require special arrangements?

Can differences in corporate values and culture be accommodated?

Are operations centralized or decentralized?

Are organizational structures compatible?

Do the partners have similar attitudes to marketing and distribution strategies or customer service?

Are their financial objectives compatible?

Do partners have a similar understanding of the risk involved?

Do partners agree on distribution of dividends, reinvestment, and indicators of financial performance?

Do partners have similar employee policies, compensation programs, hiring strategies, and attitudes to labour relations?

Slide 4: Finding Partners

There are many sources of information and assistance that can provide the names of potential candidates, supply background information about them, and help to verify information provided by the candidates.

Business associates

Business associates with experience in the target country are valuable. A company can often hear about a potential partner when discussing other matters with a business contact.

Governments

In most countries, companies can approach the government department responsible for trade for information and resources. Trade departments will offer advice on exporting and other market entry strategies and will have databases of trade, investment, and technology counsellors abroad.

Foreign embassies and trade commissioners in foreign markets

Many countries have trade counsellors attached to their embassies, or can otherwise provide business information and contacts in their home countries.

Business associations

Business associations (chambers of commerce, boards of trade, industry associations, and bilateral business councils) can provide contacts and business information.

Business advisors

Companies should consider using consultants and specialists, such as lawyers and accountants, to search for potential partners.

Financial institutions

Banks, individual traders (brokers), and trading companies are all useful sources of information about potential partners in a target market.

Commercial databases

There are a variety of commercial databases that provide business information, including contact information. There are also services that are more specifically geared to partnering.

The International Chamber of Commerce (www.worldchambers.com) provides many services for international companies. One of the most helpful is the official Chamber directory. This has 14,000 entries representing 40 million companies and is a network for establishing new business contacts and obtaining helpful market information. The directory can be browsed for validated business partners, public tenders, and trade fairs.

Expos and trade shows

Companies can also use trade shows or trade fairs to connect with potential partners as well as determine the market potential for their goods and services.

Participating in international trade shows

Companies can participate in trade shows in a variety of ways:

1. They can attend a show as visitors. They can use such attendance to see who their competitors are, gauge the market and develop a list of contacts for later follow-up.

2. They can participate in shows as exhibitors. Though more expensive, exhibiting at a show can pay off in terms of raising awareness, developing contacts and enhancing prestige. In order to cut down on the costs of exhibiting, smaller companies can join with other companies to present an integrated exhibit.

3. They can participate in panel discussions or make a presentation. Many trade fairs also feature speakers and workshops as part of their activities.

Published studies and books

A variety of research institutions and government agencies conduct economic and market research, and publish studies of their market research.

Activity: Report

The U.S. government site www.export.gov has useful information and links for companies interested in international trade. One useful feature of the site is a searchable list of trade events.

The trade events list can be accessed here:

www.export.gov/eac/trade_events.asp

Conduct a search to identify trade events associated with an industry you are interested in that is taking place in a country of your choice.

Prepare a report detailing your results and discussing how useful you found this search facility.

Post your report on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Slide 5: Performing Due Diligence

When a company has selected a potential partner, an essential step before conducting negotiations is to perform due diligence. This is a type of research that must be conducted to ensure that the prospective partner is exactly what it appears to be.

Due diligence involves investigating such areas as the partner’s:

Track record

Financial history

Ability to deliver products on time and to budget

Competitors

Legal problems

Slide 6: Summary

Selection of a foreign partner should receive as much, if not more, focus and scrutiny than selecting potential employees.

A company pursuing partners must be patient and thoroughly investigate all possibilities by conducting a strategic analysis, skills audits, capability assessments, and gap identification.

A company should start by assessing its own capabilities. This will identify the skills and resources the company already has and provide an indication of the qualities a partner should have to fill gaps.

If gaps that can be filled by a partnership are identified, a company can define the characteristics of potential partners. Partners must complement a company’s capabilities and must be able to interact effectively with the company.

To find partners, companies can use a range of sources, including business associates, government trade departments, foreign embassies and trade commissioners, business associations and advisers, financial institutions, and attendance at trade shows.

Slide 7: Exercises

Exercises

Exercise 1

Why is it essential to identify a potential partner’s strategic objectives?

Exercise 2

List the main characteristics a company must investigate about a potential partner for due diligence.

Exercise 3

Mrs. Bundt is a fictional chocolate company based in Canada that wants to find a partner in Australia for a joint venture operation. The joint venture would produce Mrs. Bundt brand chocolate in Australia. What qualities should the company be looking for in a partner?

Use the sources provided in this chapter to investigate business contacts in the target market. Identify a trade advisor or service that will be able to help Mrs. Bundt identify a potential partner.

Post your responses to these activities on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

These activities should take you about three hours to complete.

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Chapter 9: Negotiating a Partnership Agreement - Study Materials

Slide 1: The Negotiating Process

Negotiations for a partnership proceed in stages, usually starting with informal discussions between senior executives from both sides.

The main goal for the early stages is to establish trust and identify common objectives.

If the informal discussions are successful and a relationship starts to form, the next step is to appoint a more formal negotiating team.

Step 1: Define objectives for the partnership

Before entering formal negotiations, a firm must be clear about its objectives for the partnership and must have an idea of the proposed partner’s objectives.

Step 2: Assemble a negotiating team

The negotiating team should be drawn from a range of management levels and specialties. It must have the following characteristics:

Members must understand the business and social customs of the country in which they are negotiating.

Team members must appreciate all the issues affecting the partnership, from broad strategic concerns to legal and technical details.

Members should have prepared for negotiations thoroughly.

Team members should have studied all companies in the partnership in-depth.

Team members must be culturally sensitive.

The team should include an experienced interpreter if the partner companies speak different languages.

The team must include senior management personnel and personnel with knowledge of technical, operational, and legal details.

Step 3: Establish trust

Cooperation depends on mutual respect and trust. Trust enables partners to meet challenges openly and solve problems together.

However, trust in a potential partner also does not mean security issues can be ignored. Companies must pay careful attention to the attitudes and behaviour of potential partners.

The following warning signs indicate that the partnership would have a high risk of failure:

Step 4: Establish the business framework

When the two teams have met and are familiar with each other, the business framework can be constructed. This involves the two teams working toward an agreement that outlines the alliance in general terms and clearly defines its objectives.

If a firm knows what it has, what it wants, and what its objectives are, the business framework should be relatively straightforward to construct.

Defining the respective contributions of both sides is a necessary part of establishing a business framework and translating it into a legal agreement.

Key interests and concessions

During the negotiation of the business framework, companies must remain clearly focused on their key interests and must protect them at all costs. Among the points likely to generate discussion are:

Protection of intellectual property

Ongoing control over decision making

Apportionment of responsibilities and benefits

Protection against deadlock in the partnership

Overall managerial responsibility

Responsibility for specific aspects such as:

Production

Finances

Purchasing and procurement

Marketing

Sales

Distribution

After-sales service

When both teams have come to a shared understanding of the business framework, they express their agreement in a memorandum of understanding (MOU). After the MOU has been developed, the teams begin exchanging contract language, setting the stage for construction of the legal framework.

Step 5: Establish the legal framework

The legal framework is the contract language that implements the general terms of the business framework.

It establishes the partnership structure and methods of capitalization and control. It also defines the rights and responsibilities of each partner in the use and support of technology, licensing, and marketing.

Slide 2: Elements of a Partnering Agreement

The legal framework is used to put a formal partnership agreement together.

Partner roles

A statement of each partner’s roles and responsibilities must be set out in the agreement. This helps avoid misunderstandings regarding practical applications of the agreement.

Organization and structure

The partnership agreement sets out the type of business organization to be employed. This can range from a freestanding joint venture to a co-marketing arrangement. It also defines the scope of the venture, as well as options for expansion.

Financing

The financial details of a partnership depend on the nature of the agreement. However, they all must include the following key provisions:

The capital investment required from each party, if any, and the timing of the contributions

The value of the knowledge, technology or other intellectual property contributed to the partnership

The methods for calculating payments to partners, and the risks they will assume

This includes provisions for royalties, fees for service, recovery of expenses, division of profits, and any other payments contemplated by the partners

Banking arrangements, including the conditions under which the partnership may borrow, and from what sources

Accounting and legal services, including appointment of an auditor, and timing and approval of financial statements

The currencies and exchange rates used in financial transactions

The tax policies followed by the partnership

The insurance carried by the partnership, including insurance for business and non-business risks

The level of management at which financial control is exercised

The legal jurisdiction, and provisions for arbitration and dispute resolution

Management and control

It is best to define the mechanisms for exercising control and allocating responsibility at the beginning of the negotiations.There are four major ways to define control of a partnership:

1. Dominant partner. One partner dominates the decision-making process. This is relatively easy to manage.

2. Shared management. Each partner has an active role in operational or strategic decisions. Such ventures are more likely to experience conflict, but there is more opportunity for both sides to express themselves and reach effective compromises.

3. Split control. Each partner controls specific areas. Ideally, partners are assigned areas of responsibility close to their strategic objectives. Because neither partner enjoys decisive control, coordination and maintenance of objectives is extremely important.

4. Independent. The joint venture’s general manager takes responsibility for decisions. The autonomy of the joint venture is recognized and respected by all partners.

Employees

Employment policy is a key part of a partnership agreement. It should specify methods for selecting employees, and standards for evaluating performance. Compensation policy, as well as procedures for terminating employees, should also be defined.

Marketing

Specific obligations for joint marketing should be set out in detail, along with any product supply agreements.There should be some formal market development program, subject to revision and refinement as the partnership proceeds.

Restrictions on activities of members

Partnership agreements often include restrictions on the activities of the members of the alliance.

Another common provision is an area of interest clause. This requires that any property, interest, or other business opportunity acquired by any party to the joint venture be offered to the joint venture on the same terms and conditions as it was acquired.

Default by members

The partnership agreement specifies actions or omissions on the part of members that would be in default of the agreement, and the consequences of such default. There should be different penalties for different defaults.

Proprietary rights

If the partnership involves contribution of proprietary rights such as patents, trademarks or technology, the agreement sets out the terms under which this property can be used. It should also set out specific licensing arrangements, where applicable.

Term and termination

The commencement, duration and termination of the partnership agreement must be clearly defined.

The consequences of events such as bankruptcy or the death of key personnel should be specified. Some agreements contain a hardship reopener that enables firms to modify or terminate the partnership in the event of a member’s financial hardship or the venture’s financial failure.

Other considerations

A number of other provisions are commonly included in partnership agreements:

A governing law provision: This establishes which country’s laws govern operation of the partnership

A force majeure provision: This states that major external events beyond the control of the parties may limit their obligations

Provisions for modifying the agreement or for a waiver

Provisions for arbitration of disputesActivity: Discuss

Small companies might not have substantial cash resources and might choose to use standard documents found online to structure their partnership agreement.

For example, a free form can be seen at this website:

www.ilrg.com/forms/partnership-agreement.html

Should companies consider using this type of agreement for a simple partnership? Why or why not?

Post your thoughts on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Documentation

Negotiations and formal partnership documents are based on the initial MOU. Documentation is then expanded to include specific arrangements for establishing and operating the partnership. The final partnership agreement must cover all aspects of the partnership in detail.

The partnership agreement can be supplemented by the following additional documentation, when it applies to the partnership:

Patent or trademark license agreements

Technical assistance agreements

Leases

Construction contracts

Management contracts

Employment contracts for key personnel


Question 1: What is the first step in negotiating a partnership agreement?

o. Assemble a negotiating team

p. Hire a lawyer

q. Define corporate objectives

r. Prepare an MOU

Question 2: What is a business framework?

s. The contract language that defines the terms of a partnership

t. The legally agreed partnership structure

u. The legally defined rights and responsibilities of a company in a partnership

v. A general outline of a partnership agreement

Answers: C, D

Slide 3: Summary

When a company has identified a suitable partner to work with, it must negotiate a partnership agreement that details the responsibilities of each party.

It is important to establish trust early in the negotiating process, but companies must be aware of danger signals, such as difficulty in coming to agreements or a potential partner acting in a way that seems dishonest.

Negotiations aim to establish a business and a legal framework, from which a partnership agreement can be drawn. The agreement should contain details about the following:

Partner roles

Organization and structure

Financial arrangements

Management and control of the partnership

Employee policies

Marketing policies

Proprietary rights

Treatment of disputes

A partnership can never be guaranteed to be successful, but careful planning and negotiation will make a successful outcome more likely.

Slide 4: Exercises

Exercises

Exercise 1

Describe the elements of a business framework and a legal framework in partnership negotiations.

Exercise 2

In negotiations, what warning signs should a company be looking for?

Exercise 3

List three (3) important reasons for introducing a MOU.

Exercise 4

What are the four ways in which control can be assigned to a partnership?

Exercise 5

In pairs, choose two fictional companies that might partner and identify their product or service. Then, choose two countries, one for each market.

Select one of the companies and imagine that you are the company owner. Your partner should become the imaginary owner of the second company.

Imagine that the two companies are in negotiations to form a joint venture. Perform the following tasks:

1. Answer the following questions:

What would be the objectives for your company in the negotiations?

What would be the most important negotiating elements for your company?

How could you ensure that the partner company would benefit from the negotiations?

What outside help would your negotiating team require?2. After preparing for the negotiations in this way, make your case to your partner. Can you come to an amicable agreement? Estimated time to complete: 45 minutes



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Chapter 10: Managing International Business Operations - Study Materials

Slide 1: Monitoring Performance

Because of the expense and business risks of international trade, it is essential for companies to know whether their partnerships are providing the required benefits.

Measurement criteria

Monitoring and measurement of partnerships is only possible if companies have a clear idea of the value the partner should be bringing to the partnership. This should have been specified during partnership negotiations.

When establishing a partnership, companies must agree on what partners should achieve, define the performance criteria, and develop a plan for measuring the criteria regularly. Performance criteria can be qualitative or quantitative.

Quantitative performance criteria

Quantitative criteria are those indicators that involve measurements and numbers. Results for quantitative criteria can be shown numerically, such as a graph showing levels of sales or time between deliveries.

Qualitative performance criteria

Qualitative criteria are also important to the assessment of a partnership. These criteria are ones that cannot be enumerated. Measurement of qualitative criteria is often dependent on the opinion of the individual gathering the data because it relates to the quality or characteristics of something.

Performance measurement systems

When companies have agreed criteria for monitoring partner’s performance, they must establish a system for monitoring and measuring these criteria. This involves making a number of design decisions.

One of the most important decisions is the frequency of evaluation. Because companies will be uncertain of how successful a partnership will be, new partnerships are usually assessed more frequently for the first few years, and then less often as time passes.

Another important step is deciding who will perform the assessment.

The measurement design must also include a plan for communicating the results of assessment to key personnel.

Slide 2: Partnership Communication

Before finalizing a partnership agreement, companies should discuss a communications plan. Basically, a communications plan contains the following features:

Objectives: What will communication achieve? Objectives might include team building, discussion of progress, or collaboration on a project.

Messages: What information will be communicated?

Audience: Who will be communicated with? Will partners communicate solely through senior management or will all employees receive some or all partnership communications? Will the communications plan be solely internal to the partnership, or will information be passed to external parties, such as stakeholders, as well?

Schedule: When will communications take place? For example, a communications plan might schedule a regular progress update meeting once a month, with a partnership review annually.

Method: What methods will be used for communication? These can include Electronic Data Interchange (EDI) for real-time inventory and shipping communications, email or regular mail for business communications, telephone or web conferences for meetings, and a website to post information for employees. Different methods should be used for different audiences. Companies should assess which methods will be most cost effective and timely for each message that must be communicated.

Other plans

As well as a communications plan, companies should agree on three other plans with their partners. These are a documentation plan, a shared information plan, and a reporting plan.

Documentation plans detail what documentation partners must prepare, formats that must be used, when and how it must be shared with partner companies, and the length of time that documents must be stored.

A shared information plan details what information must be shared between partners, and which information can be kept private.

A reporting plan documents how and when partners should report to each other.

Conferences

The most cost-effective and efficient ways of conducting meetings internationally are telephone conference calls.

When all partners have access to reliable, high-speed Internet; web conference services provide an ideal meeting forum.

Slide 3: Partner Development

Partners must have the following abilities:

They must understand the product and service they are working with.

They must be able to use any special equipment or technology used in production of goods or provision of services.

They must be able to use all communication technologies.

They must be able to prepare required documentation to standards required by the partnership agreement.

A company will be very unlikely to find a partner that fulfils all these criteria. Companies must therefore plan a partner development strategy to ensure that partner employees have all the knowledge and skills required to help the enterprise succeed. A partner development strategy should outline the following stages:

Orientation

Training

Mentoring

Performance Appraisal

Orientation

The orientation process ensures that partners understand the mission, purpose and vision of the partnership. It also helps partner employees understand their role in the partnership and the tools they will use to carry out their responsibilities.

A process should be set up to provide new employees with the following:

An overview of the venture’s mission and organizational structure

Details of its operations (including a tour of facilities)

A clear description of their own responsibilities, how their performance will be evaluated, and what rewards might be expected

Training

Training, if it is relevant to the tasks people perform on the job, can improve individual and group performance. Whether training is delivered in person or over the internet will depend on the following factors:

The number of locations to which training must be delivered

The number of partner employees that must be trained

The equipment or software for which training must be developed

The available training budget

Mentoring

For the greatest chance of success, companies should organize a mentoring system to supplement training. Experienced mentors from the company should be assigned to groups of partner employees and be available to support them and answer questions as needed.

Performance appraisal

Formal staff assessment is an effective way to improve performance. It can be used to determine compensation and to encourage continuous professional development.

The goals set for employees should be both short- and long-term, and should be reassessed as the partnership is adapted to respond to changes in the business environment.

Slide 4: Conflict Resolution

A willingness to be flexible is more important than any formal method of conflict resolution. Some disputes can be avoided altogether through the clear delineation of responsibilities.

Early recognition of conflicts

The overriding principle of effective conflict resolution is to try to settle disputes at the earliest and least formal stage possible. Formal conflict resolution methods should only be started if disputes cannot be settled at an early stage.

Internal resolution

If a dispute cannot be resolved by direct reference to the partnership agreement, recourse to internal solutions should be the next step. Some companies refer the dispute to the officials who negotiated the agreement. The officials meet and try to agree on what their original intentions were. Another approach is to set up a conflict resolution board drawn from both companies, to hear the issues and pass judgement. A skilled mediator may be brought in to help the board in this task.

Third-party dispute resolution

Some companies with experience in partnerships recommend appointing a neutral third party to help with negotiations between partners who have serious disagreements. Such a person, or company, should be known and respected by all parties involved.

A major problem with bringing third parties into conflict resolution is that it can alert competing companies and stakeholders to the problems that are being experienced. Competitors might use partnership dissent to expand their share of the market.

Using the courts to settle disputes with international partners is likely to be ineffective, because of the great differences between legal systems in different countries. It also undermines confidence in the partnership. It is therefore better to look for other means of averting or resolving conflict.

Slide 5: Summary

Partnerships will only be profitable if companies are willing and able to devote a substantial amount of time and energy to them.

Companies should develop proactive strategies for managing partners and communicating with them.

Companies should also ensure that monitoring is performed regularly. Partner communications should always be planned in advance to ensure that the messages that need to be communicated are being shared with partners and that the most effective means of communication are being employed.

Whenever possible, disputes should be resolved internally by reference to the partnership agreement or by engaging senior management to conduct negotiations. If internal resolution is not possible, mediators can be brought in to help resolve the dispute.

Slide 6: Exercises

Exercises

Exercise 1

TPlus is a fictional company manufacturing training shoes. TPlus wants to reduce costs involved in production and thus increase its profitability.

Based on these business objectives, what would be the likely measurement criteria for a partnership between the company and a supplier of the training shoe components (laces, synthetic soles, and leather uppers) located in India?

Prepare a basic communications strategy between the TPlus and its fictitious supplier partner.

Exercise 2

This chapter’s case study described how Starbucks had disputes with many of its partner suppliers. How might this situation have been averted? Could dispute resolution have resulted in a more successful outcome for all parties involved?



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Chapter 11: Exit Strategies - Study Materials

Slide 1: Planning an Exit Strategy

It is essential to plan exit strategies at the very start of a partnership arrangement, before the parties are locked into an agreement. A partnership agreement can then include exit clauses, which will act as a contingency arrangement if one or both partners wish to leave the market or the partnership.

Reasons for ending partnerships

There are several reasons why companies might wish to leave a partnership earlier than agreed upon:

The partnership is not meeting its strategic objectives.

There are major problems in the partnership resulting from differences in management style, personality clashes, or disagreement over strategic objectives.

One partner has broken the terms of the partnership agreement.

The partnership is no longer able to help one of the partners meet its strategic objectives for a market.

One partner needs to break up the partnership earlier than agreed because of financial issues.

The partnership has fulfilled its purpose.

Exit Strategies

There are a variety of exit strategies that a company can consider when deciding how it might leave a market or a business partnership.

Exit Strategies

Strategy Details

AcquisitionThe company is purchased by another business or the company’s share of a joint venture is purchased. This enables a company to leave a market and a partnership.

SaleIndividuals purchase the company or the company’s share of a joint venture. This enables a company to leave a market and a partnership.

Buy Out

The company purchases a partner’s share of operations or arranges for the partner to buy out its share of operations. This enables a partnership to be ended, but does not necessarily mean the company leaves the market.

ReorganizationThe partnership can be restructured and reorganized. One or more partners can leave the partnership, or new partners can join.

Close operations

The company can cease operations or end a partnership completely.

Slide 2: Exit Clauses

Partnerships can be ended whether or not exit clauses are included in partnership agreements. Exit clauses simply make the process of ending a partnership simpler and less expensive. For clarity, they should include the following details:

Conditions for termination

Disposition of assets and liabilities

Dispute resolution methods

Time required to exit and notice that must be given

Compensation required and employee severance payments

Conditions for Termination

Establishing performance criteria might mean drawing up a partnership agreement that specifies what each side is to do and that contains performance benchmarks.

If key targets are not met, a process of review, imposition of penalties, and even disengagement might be initiated. Such benchmarks, however, should be accompanied by a mechanism for objective measurement.

In many types of businesses, performance criteria may be accompanied by bonds or other types of guarantees.

There are other conditions that can be built into a partnership agreement as a reason for restructuring or ending a partnership. These include:

A change of ownership or management in one of the partner companies Bankruptcy or serious financial problems in one or more partners Theft of intellectual property by one or more partners A sudden and serious change in market conditions, such as war The successful achievement of the partnership’s goals An unforeseen event, usually called an “act of God”, that results in one or more partners being unable to function Violation of specific terms of the partnership agreement, such as a non-competition clause Cost overruns beyond specified limits Financial malfeasance, such as price gouging, dishonest accounting, or embezzlement Violation of ethical principles, such as bribery, dealings with illegal institutions, or criminal behaviour Refusal to accept arbitration or the decisions of arbitration A partner being discovered working with a direct competitor

Disposition of Assets and Liabilities

If a partner wishes to exit a partnership, or a company wishes to end its alliance with a partner, negotiations between the companies as to the division of property, finances, and debts can take many months if these issues are not defined in the partnership agreement.

Some assets are not divisible. A production facility or a list of clients cannot be apportioned; neither can business good will. In many cases, one or other of the partners will have to assume the whole business, with the other party receiving compensation.

Where one party wants to leave the partnership, it might be fairly straightforward to build in a provision for selling that portion of the partnership to the other party. If the partner does not want the assets or wants only a portion, the rest could be offered to other prospective partners or investors.

In dividing assets, an important and often difficult issue is to determine what contributions both sides have made during the course of the partnership. Companies should therefore ensure they keep efficient records that can be used as evidence in arbitration.Some lawyers recommend including a shotgun clause into the partnership agreement. This clause is often used to force a buy out.

Dispute Resolution

A partnership agreement should also detail a dispute resolution process that the parties agree is fair and will accept as binding.

Many contracts provide for dispute resolution by allowing appeals to be directed to a specified neutral institution, such as the International Chamber of Commerce.

The partnership agreement should also specify the legal system under which the contract will operate. The contracting parties can choose to be bound by either the laws of one of their respective countries, the laws of a third country, or the judgments of the International Court at The Hague.

There are four key characteristics of the dispute resolution process:

Two very common dispute resolution mechanisms in commercial agreements are arbitration and mediation.

Arbitration

In arbitration, a dispute is submitted to an independent third party (the “arbitrator”) for decision and final resolution.

Mediation

Mediation is a non-binding process where an impartial and independent third party, with no decision-making power (the “mediator”), attempts to facilitate a mutually acceptable settlement between disputing parties.


The ICC Commission on Arbitration has members from more than 90 countries. It has developed a set of dispute resolution rules for international trade.

www.iccwbo.org/court/arbitration/id4199/index.html

The rules can be downloaded in several languages.

Read through the rules. If you like, post your thoughts on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.

This activity should take you about two hours to complete.

Time Taken to End the Partnership

If a partnership cannot be saved, it should be terminated in the fastest and most amicable manner possible. This will benefit both parties.

A partnership agreement’s exit clauses should detail the notice that a partner that wants to terminate the relationship must give to the other party to avoid business losses as much as possible and enable the partner to find another alliance.

Compensation

It is important to include a penalty clause to cover a situation in which a partnership is terminated unilaterally without due cause or reasonable grounds. That penalty should cover the costs incurred by the abandoned partner as a result of the action.

Slide 3: Protection After a Partnership

Companies should protect themselves by specifying acceptable post-partnership behaviour in the partnership agreement. These post-partnership clauses will depend on the type of business and the partnership a company is involved in. The following are some possible examples:

A non-competition clause. This obliges the side leaving the partnership not to compete in the same business for a period of time.

Non-disclosure clauses governing technology. These can extend beyond the life of a partnership and specify that any technological secrets learned during the relationship cannot be disclosed, even after it ends.

Mutual property clauses. These can state that technologies or patents developed jointly during the partnership will become mutual property, with both ex-partners having a say (or a veto) over how the technology can be used or to whom it can be offered.

Clauses determining ownership of client lists. Client lists can be shared jointly, they can be split up between the sides, or one partner can acquire the list with the other prohibited from approaching anyone on it.

Good will clauses. The good will contributed or shared by the parties must be protected, and a clause might stipulate that the parties will not discuss the partnership and will protect each other’s reputations after the relationship is terminated.

Slide 4: Terminating Investments

Terminating an investment has many of the characteristics of terminating a partnership. For example, assets have to be evaluated, respective contributions apportioned, a sale made (either to a partner or to other investors) and the proceeds divided, just as in any other type of partnership.

The repatriation of contributions, assets or profits is an extremely important consideration when terminating an investment in another country. Much depends on the legal environment in that country and the specific regulations governing foreign investments.

Slide 5: A Graceful Exit

Terminating a partnership does not have to be a negative experience, nor must it inevitably be associated with business failure.

Ending a partnership can also be part of the process of repositioning a company in the marketplace or in a new line of business.

Terminating a relationship can be an opportunity for the parties to reorient their objectives, pursue new interests, and develop new partnerships.

Slide 6: Summary

Successful exits of foreign markets and partnerships can be as important as a successful entry.

Companies should plan exit strategies in advance and ensure that their partnership agreements detail possible reasons partnerships might end, and the terms and conditions associated with ending an alliance.

It is important to clarify how disputes will be handled through mediation or arbitration and document dispute resolution procedures in the partnership contract.

An exit strategy allows for a company to leave the partnership gracefully and enables resources to be geared towards new more successful and profitable ventures.

Slide 7: Exercises

Exercises

Exercise 1

List the reasons why a company might want to end a partnership.

Exercise 2

What exit clauses should a company include in a partnership agreement for your target market?

If you are working for a company interested in international trade, consider your company’s unique product or service and how this might affect partnership disputes. If not, select a well-known company and consider how its product or service might affect partnership disputes.

Exercise 3

How can a company protect its operations from former partners?

Post your responses to all activities on the main discussion forum. Review your colleagues’ responses and reply to any that you find interesting. Please remember to be courteous.


Slide 8: Closing Session

Thank you for your participation in the FITTskills: International Market Entry Strategies online. FITT hopes that it has been a valuable learning experience for you, and that your business, or your employers, will benefit as a result.

Reminder

You now have 30 days to complete your online exam.

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