Transcript Selecting and Managing Entry Modes

Selecting and Managing
Entry Modes
Entry Modes
• “The institutional arrangement by which a firm get
its products, technologies, human skills or other
resources into a market
- To manufacture and/or sell
• Entry modes depend of several factors
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Ownership advantages of the company
Location advantages of the market
International experience
Potential size of the market
Ability to develop differentiated products
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Alternative Operating Modes for Foreign Market
Expansion
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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 intermediaries)
• Sales representatives
• Distributors
• Agents
• Export management companies
• Export trading companies
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Export Issues
• What does the company want to gain from exporting
– Expand sales, Diversify sales, Gain experience
• Is exporting consistent with company goals
• What demands will exporting place on:
– Key management and personnel
– Production capacity
– Financing
• Are the benefits worth the costs
• Could resources be better used developing new
domestic business
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Characteristics of Exporters
• Probably of being an exporter increases with
company size defined by revenues
• Export intensity, the % of revenues coming
from exports, is not positively correlated with
company size
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Phases of Export Development
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Potential Pitfalls of Exporting
• Failure to obtain qualified export counseling and to
develop a master international marketing plan
• Insufficient commitment by top managers
• Insufficient care in selecting overseas agents or
distributors
• Chasing orders from around the world instead of
establishing a base of profitable operations and
orderly growth
17-8
Potential Pitfalls of Exporting, con’t
• Neglecting export business when the domestic
market booms
• Failure to treat international distributors on an
equal basis with their domestic counterparts
• Unwillingness to modify products to meet
other countries’ regulations or cultural
preferences
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Avoiding Export Blunders
Conduct market research
Obtain export advice
Consider a freight forwarder
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Countertrade
• Countertrade is a sale that encompasses more than
an exchange of goods, services, or ideas for money.
• Conditions that favor countertrade: lack of money,
lack of value or faith in money, lack of acceptability
of money as an exchange medium.
• 25% of the global trade is countertrade related
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Forms of Countertrade
Barter Direct exchange without money
Counterpurchase Sale to a country in return for promise of future
purchase from it (reciprocal)
Offset agreement Offset a hard-currency sale to a nation
with future hard-currency purchase. (part of
exported good is produced in the importing country)
Switch trading Sale by a company of an obligation to purchase
from a country
Buyback Export of industrial equipment in return for products
the equipment produces
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Example of Countertrade
• Malaysia and Indonesia are bartering palm oil in exchange for 18 Russian
SU-30 jet fighter planes. (According to the Stockholm International Peace
Research Institute, Russia was the most prolific exporter of armaments in
2002, racking up 36% of all global deliveries.)
• Indonesia is building and then bartering a $300 million fertilizer plant in
Vietnam, taking back rice and sugar in the exchange.
• Oil-rich Libya is bartering fuel to Zimbabwe in exchange for beef, coffee
and tea.
• Boeing used counterpurchase to sell aircraft to Saudi Arabia for oil and to
India for coffee, rice, castor oil and other goods
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Types of Importers
• Those looking for any product that they can
import
– Specialized
– Generalized
• Those looking at foreign sourcing to get their
products at the cheapest prices
• Those looking for foreign sourcing as a part of
their global supply chain
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Export/Import Financing
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High-Risk Approaches
Advance payment
Open account
Importer pays exporter
for merchandise
before it ships
Exporter ships
merchandise and
later bills importer
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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 specified
sum of money at a
specified time
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
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Irrevocable
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Revocable
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Confirmed
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Letter of Credit Process
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Licensing
Company owning intangible property (licensor) grants
another firm (licensee) the right to use it for a specified time
Advantages
Disadvantages
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Finance expansion
Reduce risk
Reduce counterfeits
Upgrade technologies
– Restrict licensor’s future
– Reduce global consistency
– Lend strategic property
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Motives for Licensing
• Small expected sales volume
• Limited time of opportunity
• Product is only a small part of company’s total
output
• Local company may be able to produce
product cheaper
• Local company may have a shorter start-up
time
14-10
Franchising
Company (franchiser) supplies another (franchisee)
with intangible property over an extended period
Advantages
Disadvantages
+ Low cost and low risk
+ Rapid expansion
+ Local knowledge
– Cumbersome
– Lost flexibility
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Motives for Franchising
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Economies of scale
Standardization
Central purchasing
High identification through promotion
Learning processes
Effective cost controls
14-12
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 Arrangements
• Arrangement in which one company contracts another to
build complete, ready-to-operate facilities
• Typically very large contracts
• Typically construction projects
• Requires top-level contacts abroad
• Motivations
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Export financing
Managerial and technological quality
Expertise
Turnkey operator are specialists in working in remote areas often
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Turnkey Project
Company designs, constructs and tests
a production facility for a client
+ Firms specialize in core
Advantages
Disadvantages
competency
+ Nations obtain infrastructure
projects
– Politicized process
– Create competitor
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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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Strategic Alliances & Objectives
14-7
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
Protect interests
Disadvantages
Create competitor
Partner conflict
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Joint Venture
Separate company created and jointly owned by two or more
independent entities to achieve a common business objective
Forward • Backward • Buyback • Multistage
Advantages
• Reduce risk level
• Penetrate markets
• Access channels
• Protect interests
Disadvantages
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Partner conflict
Lose control
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Entry Modes: Strategic Factors
Cultural environment
Political/Legal environments
Market size
Production and shipping costs
International experience
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Risk, Control, Experience
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