Global Marketing Management Planning and Organization Week 8

Alternative Market-Entry Strategies § A company has four different modes of foreign market entry from which to select: exporting, contractual agreements, strategic alliances, and direct foreign investment § The amount of equity required by the company to use different modes affects the risk, return, and control that it will have in each mode 12 -2

Exhibit 12. 2 Alternative Market-Entry Strategies 12 -3

Exporting § Exporting accounts for some 10 percent of global economic activity. § Exporting can be either direct or indirect: • With direct exporting , the company sells to a customer in another country • With indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country, which in turn exports the product 12 -4

Exporting § The Internet • The Internet is becoming increasingly important as a foreign market entry method • Should not be overlooked as an alternative market entry strategy by the small or large company § Direct Sales • A direct sales force may be required particularly for hightechnology and big ticket industrial products • It may mean establishing an office with local and/or expatriate managers and staff, depending of course on the size of the market and potential sales revenues. 12 -5

Contractual Agreements § Contractual agreements are long-term, non equity associations between a company and another in a foreign market. § Contractual agreements generally involve the transfer of technology, processes, trademarks, and/or human skills. In short, they serve as a means of transfer of knowledge rather than equity. 12 -6

Contractual Agreements § Contractual agreements are long-term, non equity associations between a company and another in a foreign market § Contractual agreements involve the transfer of technology, processes, trademarks, and/or human skills. § They serve as a means of transfer of knowledge rather than equity 12 -7

Contractual Agreements: Licensing § Licensing is a means of establishing in foreign markets without large capital outlays § Includes patent rights, trademark rights, and the rights to use technological processes 12 -8

Contractual Agreements: Licensing § Advantages • capital is scarce • import restrictions forbid other means of entry • a country is sensitive to foreign ownership or • patents and trademarks must be protected against cancellation for nonuse. § Risks • choosing the wrong partner • quality and other production problems • payment problems • contract enforcement and • loss of marketing control 12 -9

Contractual Agreements: Franchising § Franchising is a rapidly growing form of licensing § The franchiser provides a standard package of products, systems, and management services, and the franchisee provides market knowledge, capital, and personal involvement in management § The combination of skills permits flexibility in dealing with local market conditions and yet provides the parent firm with a reasonable degree of control. § The franchiser can follow through on marketing of the products to the point of final sale § It is an important form of vertical market integration 12 -10

Contractual Agreements: Franchising § The franchise system provides an effective blending of skill centralization and operational decentralization § In spite of the economic downturn, franchising is still expected to be the fastest growing market-entry strategy § Franchises were often among the first types of foreign retail business to open in the emerging market economies of eastern Europe, the former republics of Russia, and China § The franchising system combines the knowledge of the franchiser with the local knowledge and entrepreneurial spirit of the franchisee 12 -11

Strategic International Alliances (SIAs) § A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective § Strategic international alliances are sought as a way to shore up weaknesses and increase competitive strengths; complementarity is key. § Firms enter into SIAs for several reasons: • • • opportunities for rapid expansion into new markets access to new technology more efficient production and innovation reduced marketing costs strategic competitive moves and access to additional sources of products and capital. 12 -12

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Strategic International Alliances: International Joint Ventures (IJVs) § A joint venture is different from other types of strategic alliances or collaborative relationships in that a joint venture is a partnership of two or more participating companies that have joined forces to create a separate legal entity. § Four characteristics define joint ventures: • JVs are established, separate, legal entities • they acknowledge intent by the partners to share in the management of the JV • they are partnerships between legally incorporated entities and not between individuals and • equity positions are held by each of the partners 12 -14

Strategic International Alliances: Consortia § Consortia are similar to joint ventures and except for two unique characteristics: • they typically involve a large number of participants • they frequently operate in a country or market in which none of the participants is currently active § Consortia are developed to pool financial and managerial resources and to lessen risks § One firm usually acts as the lead firm, or the newly formed corporation may exist independently of its originators 12 -15

Direct Foreign Investment § Direct foreign investment is direct investment within a foreign country § Companies may invest locally to: • • • capitalize on low cost labor avoid high import taxes reduce the high costs of transportation to market gain access to raw materials and technology or as a means of gaining market entry § Firms may either invest in or buy local companies or establish new operations facilities 12 -16

Direct Foreign Investment § Several factors have been found to influence the structure and performance of direct investments: timing—first movers have advantages but are more risky the growing complexity and contingencies of contracts transaction cost structures technology and knowledge transfer degree of product differentiation the previous experiences and cultural diversity of acquired firms • advertising and reputation barriers • • • 12 -17

Organizing for Global Competition § Companies are usually structured around one of three alternatives • global product divisions responsible for product sales throughout the world • geographical divisions responsible for all products and functions within a given geographical area • a matrix organization consisting of either of these arrangements with centralized sales and marketing run by a centralized functional staff, or a combination of area operations and global product management 12 -18

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Locus of Decision § Relates to where decisions will be made, by whom, and by which method § Management policy must be explicit about which decisions are to be made at which level § Most companies limit the amount of money to be spent at each level § Decision levels for determination of policy, strategy, and tactical decisions must be established § Tactical decisions are usually made at the lowest possible level 12 -20

Centralized versus Decentralized Organizations § Organizational patterns for the headquarters’ activities of multinational firms usually fit into one of three categories: • Centralized • Regionalized • Decentralized § The advantages of centralization are: • the availability of experts at one location • the ability to exercise a high degree of control on both the planning and implementation phases • the centralization of all records and information 12 -21

Centralized vs. Decentralized Organizations § Some companies implement extreme decentralization by giving selecting competent local managers full responsibility for national or regional operations § Even though product decisions may be highly centralized, subsidiaries may have a substantial amount of local influence in pricing, advertising, and distribution decisions § If a product is culturally sensitive, the decisions are more likely to be decentralized 12 -22