Transcript Selecting and Managing Entry Modes

13
Selecting
and Managing
Entry Modes
Copyright © 2014 Pearson Education, Inc.
Chapter Objectives
• Explain how companies use exporting, importing,
and countertrade
• Explain the various means of financing export
and import activities
• Describe the different contractual entry modes
that are available to companies
• Explain the various types of investment entry
modes
• Discuss the important strategic factors in
selecting an entry mode
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Marvel Enterprises
• Licenses characters for films and products
• Earns royalties from licensing agreements
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Exports to the United States
Source: Based on data contained in International Trade Statistics 2011 (Geneva, Switzerland: World Trade Organization, November 2011), Table II.30, p. 81–82.
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Developing an Export Strategy
Step 1
Step 2
Step 3
Step 4
Identify a
potential market
Match needs to
abilities
Initiate
meetings
Commit
resources
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Degree of Export Involvement
Direct exporting
Indirect exporting
(sell to buyers)
(sell to intermediary)
• Sales representative
• Distributor
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• Agent
• Export management company
• Export trading company
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Avoiding Export Blunders
Conduct market research
Obtain export advice
Hire a freight forwarder
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Discussion Question
What are the four
steps companies
can follow when
building an export
strategy?
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Answer to Discussion Question
First, a firm should identify a
potential market through careful
market research and analysis.
Second, it should match the
needs of the market to its ability
to satisfy those needs. Third, it
should initiate meetings with
potential distributors, buyers, and
others. Fourth, it should commit
human, financial, and physical
resources to get the job done.
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Forms of Countertrade
Barter Direct exchange without money
Counterpurchase Sale to a nation in return for promise of
future purchase from that nation
Offset agreement Offset a hard-currency sale to a nation
with future hard-currency purchase
Switch trading Sale by a company of an obligation to
purchase from a country
Buyback Export of industrial equipment in return for
products that the equipment produces
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Barter in Argentina
• Barter (Trueque) in Argentina
• Clothing, food, cars, etc.
Agencia el Universal/El Universal de Mexico/Newscom
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Export/Import Financing
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High Risk Methods
Open account
Advance payment
Exporter bills importer
after merchandise ships
Importer pays exporter
before merchandise ships
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Documentary Collection
Bank acts as intermediary without accepting financial risk
Draft (bill of exchange)
Document that orders
an importer to pay an
exporter a specific
sum of money at a
specific time
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Bill of lading
Contract between an
exporter and shipper
specifying destination
and shipping costs
for merchandise
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Documentary Collection Process
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Letter of Credit
Importer’s bank issues a document stating
that the bank will pay the exporter when
exporter fulfills document’s terms

Irrevocable
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
Revocable

Confirmed
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Letter of Credit Process
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Discussion Question
Export/import financing
whereby a bank acts as an
intermediary without
accepting financial risk is
called __________.
a. Offset financing
b. Letter of credit
c. Documentary collection
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Answer to Discussion Question
Export/import financing
whereby a bank acts as an
intermediary without
accepting financial risk is
called __________.
a. Offset financing
b. Letter of credit
c. Documentary collection
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Licensing
Company owning intangible property (licensor) grants
another firm (licensee) the right to use it for a specific time
Advantages
Disadvantages
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+
+
+
+
Finance expansion
Reduce risks
Reduce counterfeits
Upgrade technologies
– Restrict licensor’s activities
– Reduce global consistency
– Lend strategic property
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Franchising
Company (franchiser) supplies another (franchisee)
with intangible property over an extended period
Advantages
Disadvantages
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+ Low cost and low risk
+ Rapid expansion
+ Local knowledge
– Cumbersome
– Lost flexibility
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Management Contract
Company supplies another with
managerial expertise for a
specific period of time
Advantages
+ Few assets risked
+ Nations finance projects
+ Develops local workforce
Disadvantages
– Personnel at risk
– Create competitor
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Turnkey Project
Company designs, constructs, and tests
a production facility for a client
Advantages
Disadvantages
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+ Firms specialize in competency
+ Nations obtain infrastructure
– Politicized process
– Create competitor
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Discussion Question
In what ways does
franchising differ
from licensing?
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Answer to Discussion Question
First, franchising gives a
company greater control over the
sale of its product in a target
market than does licensing.
Second, franchising is primarily
used in the service sector,
whereas licensing is common in
manufacturing industries. Third,
franchising requires ongoing
assistance from the franchiser,
but licensing normally involves a
one-time transfer of property.
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Wholly Owned Subsidiary
Facility entirely owned and controlled by
a single parent company
Advantages
+ Day-to-day control
+ Coordinate subsidiaries
Disadvantages
– Expensive
– High risk
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Joint Venture
Company created and jointly owned by two or
more entities to achieve a common objective
Advantages
Disadvantages

Reduce risk level

Partner conflict

Penetrate markets

Lose control

Access channels
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Joint Venture Configurations
Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business,” in Farok J. Contractor and Peter Lorange (eds.), Cooperative Strategies in International Business (Lexington, MA: Lexington Books, 1988), pp. 31–53.
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Strategic Alliance
Entities cooperate (but do not form a separate
company) to achieve strategic goals of each
Advantages
Share project cost
Tap competitors’ strengths
Gain channel access
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Disadvantages
Partner conflict
Create competitor
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Selecting Partners
 Commitment
 Trustworthiness
 Cultural knowledge
 Valuable contribution
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Strategic Factors
Cultural environment
Political/Legal environments
Market size
Production and shipping costs
International experience
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Discussion Question
An investment entry mode
that gives a company the
most control over day-today activities in a host
country is called a
__________.
a. Joint venture
b. Strategic alliance
c. Wholly owned subsidiary
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Answer to Discussion Question
An investment entry mode
that gives a company the
most control over day-today activities in a host
country is called a
__________.
a. Joint venture
b. Strategic alliance
c. Wholly owned subsidiary
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