International Market Entry Modes Objectives Objectives Learning Explain

International Market Entry Modes

Objectives: Objectives Learning • Explain the international market entry methods • Discuss whether being a market pioneer or a fast follower is more useful • Discuss channel members available to companies that export or manufacture overseas

Pioneers vs. Fast Followers • Pioneers • Can gain and maintain competitive edge in new market • Overall pioneers may not perform as well in the long run as followers • Most successful when • High entry barriers exist • Firm has sufficient size, resources, and competencies • Followers • Many become followers by default • May be advantage to let pioneer take initial risks • Most successful when • Few legal, technological, cultural, or financial barriers • Sufficient resources or competencies to overwhelm the pioneer’s early advantage

Entering Foreign Markets • Nonequity modes of market entry • Exporting • • • Selling some regular production overseas Requires little investment Relatively free of risk Indirect exporting Direct exporting • Equity modes of market entry • Wholly owned subsidiary • Joint venture • Strategic alliance

Indirect Exporting… • Exporting of goods and services through various home-based exporters • Manufacturers’ export agents • sell for manufacturer • Export commission agents • buy for overseas customers • Export merchants • purchase and sell for own accounts • International firms • use the goods overseas

Indirect Exporting • Disadvantages • Commission to export agents, commission agents, export merchants • Foreign business can be lost if exporters decide to change their sources and supply • Firm gains little experience from transactions

Direct Exporting • Exporting of goods and services by the producing firm • Sales company option • Business established to market goods and services • Internet has made direct exporting much easier • Cost of trial low

Franchising • franchising is a contractual relationship between franchiser (owner of the company) and franchisee (buyer of a brand name). The franchiser allows the franchisee to use its trademark along with certain business systems and processes in exchange for a fee. [ • Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules • Franchiser provides a standard package of products, systems, and management services • Franchise provides market knowledge, capital, and personal involvement in management

• An increasingly popular type of franchise is…. • Master franchise • Gives the franchisee the rights to a specific area with the authority to sell or establish subfranchises

Contracts • Management Contract • Arrangement by which one firm provides management in all or specific areas to another firm. • Management contracts involve not just selling a method of doing things (like franchising or licensing) but involve actually doing them. • These tasks can include technical support, personnel management, marketing, sales training and accounting. • Contract Manufacturing • Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing

Equity-Based Modes of Entry • Wholly Owned Subsidiary • Joint Venture • Strategic Alliance

Wholly Owned Subsidiary • build a new plant (greenfield investment) • where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. • acquire a going concern • purchase distributor, to obtain a distribution network familiar with products

Joint Venture… • Joint Venture • Cooperative effort among two or more organizations that share common interest in business enterprise • corporate entity formed by international company and local owners • corporate entity formed by two international companies for the purpose of doing business in a third market • a corporate entity formed by a government

Joint Venture • Disadvantages • Profits shared • If law allows no more than 49% foreign ownership, lose control • Control with minority ownership is possible if • Take 49% of shares and give 2% to local law firm or trusted national • Take in local majority partner (sleeping partner) • Management contract • Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

Strategic Alliances… • Partnerships between competitor, customers, or suppliers that may take various forms • Aims to achieve Faster market entry and start-up Access to new • • • Products Technologies Markets Cost-savings by sharing • • Costs Resources Risks

Channel of Distribution • Links producer with foreign user • Product and its title pass from producer to user

Channel of Distribution Members: Indirect Exporting • Indirect Export Channel Members • Sell for manufacturer • Buy for overseas customers • Buy and sell for own account • Purchase on behalf of foreign middlemen or users

Indirect Exporting • Exporters that sell for the manufacturer • Manufacturers’ export agent • Acts as the international representative for various noncompeting domestic manufacturers • Export management companies (EMC) • Acts as the export department for noncompeting manufacturers • International trading companies • Acts as agent for some companies and as wholesaler for others

Indirect Exporting: International Trading Companies • Japan: Sogo Shosha • Originally established by the zaibatsu, centralized, familydominated economic groups • Korean: chaebol • Owned by Korean conglomerates • Export trading companies (ETC) • U. S. firm established principally to export domestic goods and services

Indirect Exporting… • Exporters that buy for their overseas customers • Export commission agents • Represent overseas purchasers, such as import firms and large industrial users • Paid commission by the purchaser for acting as resident buyer

Indirect Exporting… • Exporters that buy and sell for their own account • Export merchants • Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names • Cooperative exporters/piggyback exporters • Established international manufacturers that export other manufacturers’ goods as well as their own • Webb-Pomerene Associations • Organizations of competing firms that have joined together for the sole purpose of export trade

Indirect Exporting • Exporters that purchase foreign users and middlemen • Large foreign users • Buy for their own use overseas • Export resident buyers • Perform essentially the same functions as export commission agents but more closely associated with a foreign firm

Direct Exporting Distribution Channel Members • Manufacturer’s agent • Independent sales representative of noncompeting suppliers • Distributor/wholesale importer • Independent importer that buys for own account for resale • Retailer • Frequently direct importer • Trading company • Firm that develops international trade and serves as intermediary between foreign buyers and domestic sellers and vice versa