MGMT 416 International Business II Instructor Evrim Tren

MGMT. 416 International Business II Instructor: Evrim Tören

Chapter 15 Entry Modes Instructor: Evrim Tören

Business Strategies l l l Joint Ventures Licenses Company-owned stores Entering by net: The growth of social networking sites - A worldwide presence on the Web. (My. Space, Facebook, Hi 5, Twitter, Instagram). The Social networking sites are effective on the advertising of luxury brands and a campaign on the elite.

The Importance of Social Networking Sites are market leaders today. l A pioneering firm stands the best chance for longterm success in market-share leadership and profitability when; (1) It is insulated from the entry of competitors (high entry barriers), at least for a while, by strong patent protection, technology, substantial requirements. (2) The firm has sufficient size, resources and competencies to take full advantage of its pioneering position and preserves it in the face of later competitive entries. l

Organizational Competencies affect modes of Market Entry l l R&D and Marketing skills not only affect a firm’s success as a pioneer but also influence the company’s decision. The relationship between market pioneer and fast follower.

Modes of Market Entry 1. Nonequity-Based Modes of Entry l Export: Indirect or Direct l Subcontracting l Countertrade l Licensing l Franchising l Contract Manufacturing l Management contract 2. Equity-Based Modes of Entry l Wholly Owned Subsidiary l Joint Venture l Strategic Alliance l Merger and Acquisition

Types of Large Firms that operate on a multicounty scale: l l Global Domestic International Firms or Company; multinational enterprise, multinational company, transnational company and multicultural multinational company. In this chapter the aim is to examine nonequity modes of market entry modes, followed by equitybased modes and to discuss international channels of distribution.

Nonequity Modes of Entry l l l Most firms begin their involvement in overseas business by exporting –that is selling some of their regular production overseas. It requires little investment and is relatively free of risks. It doesn’t necessitate a great of human or financial resources.

The use of Nonequity options such as: l l l Turnkey Projects Licensing Franchising Management Contracts Contract Manufacturing

Indirect Exporting l l The exporting of goods and services through various types of home-based exporters. It is simpler than direct exporting because it requires neither special expertise nor large cash outlays. Exporters based in the home country do the work. Those exporters are called a number of different things including manufacturers’ export agents, who sell for the manufacturer. Manufacturers’ export agents - who sell for the manufacturer Export Commission Agents - who buy for their overseas customers Export Merchants – who purchase and sell for their own accounts. International Firms – which use the goods overseas (mining, construction and petroleum companies). – Indirect exporters pay a price for some services that’s why many companies begin to perform direct exporting.

Direct Exporting The exporting of goods and services by the firm that produces them. l The exports business is handled by someone within the firm. l Management decides to set up a sales company in the area. Sales Company: A business established for the purpose of marketing goods and services, not producing them. l The internet has made direct exporting much easier. l

Turnkey Projects l l A turnkey project is an export of technology, management expertise, and in some cases capital equipment. The exporter of a turnkey project may be a contractor that specializes in designing and erecting plants in a particular industry such as petroleum refining or steel production.

Licensing l l A contractual arrangement in which one firm grants access to its patents, trade secrets, or technology to another for a fee. By means of a licensing agreement, one firm (the licensor) will grant to another firm (the licensee) the right to use any kind of expertise, such as manufacturing processes (patented or unpatented), marketing procedures and trademarks for one or more of the licensor’s products.

Franchising l l l A 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. It is a different kind of licensing. Franchising permits the franchisee to sell products or services under a highly publicized brand name and a well-proven set of procedures with a carefully developed and controlled marketing strategy.

Management Contract l l An arrangement by which one firm provides management in all or specific areas to another firm. International companies make such contracts with – – – Firms in which they have no ownership. E. g. Hilton Hotel Joint Venture Partners Wholly owned subsidiaries.

Contract Manufacturing l l An arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing. Two ways of employing contract manufacturing. – – One way is as a means of entering a foreign market without investing in plant facilities. The firms contracts with a local manufacturer to produce products under its own brand. The second way is to subcontract assembly work or the production of parts to independent companies.

Equity Based Modes of Entry l l When management does decide to make a foreign direct investment, it usually has several alternatives available. Not all of them may be feasible in a particular country. 1. Wholly owned subsidiary 2. Joint Venture 3. Strategic Alliances

Wholly Owned Subsidiary l 1. 2. 3. A company that wishes to own a foreign subsidiary out-right may Start from the ground up by building a new plant (greenfield investment); Acquire a going concern; Purchase its distributor.

Joint Venture l l A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking. Forming a joint venture can allow the partners to avoid making expensive and time consuming investments of their own, while simultaneously helping to avoid a dangerous competition with another company.

Joint Venture cont. l l Strong Nationalism: Strong nationalistic sentiment may cause the foreign firm to try to lose its identity by joining with local investors. Expertise, Tax and other benefits: Other factors that influence companies to enter joint ventures are the ability to acquire expertise that is lacking, the special tax benefits some governments extend to companies with local partners.

Disadvantages of Joint Ventures A joint venture arrangement offers the advantage of a smaller commitment of financial and managerial resources and thus less risk. l The disadvantages: Profits are shared. If the law allows the foreign investor to have no more than 49% participation, it may not have control. Lack of control over the joint venture is the reason why many companies resist making such arrangements. l

Strategic Alliances Partnerships between (or among) competitors, customers or suppliers that may take one or more of various forms, both equity and nonequity. l Alliances may be joint ventures: The cooperation further by forming joint ventures in manufacturing and marketing. Trading versus Pooling Alliances: Pooling alliances are driven by similarity and integration. While trading alliances are driven by the logic of contributing dissimilar resources. Alliances versus mergers and acquisitions: Mergers and acquisitions are not considered alliances. Both may be ways for firms to get their hands on new technology, by either acquiring or working with smaller, innovative firms. Future of Alliances: It seems that alliances in their various forms will continue to be used as important strategic and tactical weapons. l

Channels of Distribution l l The channel system through which a product and its title pass from the producer to the user involves both controllable and uncontrollable variables. The channel of distribution is controllable to the extent that the channel captain is free to choose from the available channel members to those that will enable the firm. The aim is to reach its target market, perform the functions it requires at a reasonable cost, and permit it the amount of control it desires. If the company considers that the established channels are inadequate, it may assemble a different network. For ex: Coca Cola for its penetration in China and India.

International Channel-of. Distribution Members l l l The selection of channel-of-distribution members to link the producer with the foreign user depends on the method of entry into the market. In order to supply a foreign market, a firm must either export to a foreign country or manufacture in it. If the decision is to export: the firm may do so directly or indirectly.

Indirect Exporting Exporters that sell for the manufacturer a) Manufacturers’ export agents act as the international representatives for various non-competing domestic manufacturers. b) Export Management Companies (EMCs) act as the export department for several non-competing manufacturers. c) International Trading Companies are similar to EMCs in that they also act as agents for some companies and as merchant wholesalers for others. 1.

Indirect Exporting Cont. 2. Exporters that buy for their Overseas Customers Export Commission Agents represent overseas purchasers, such as import firms and large industrial users. They are paid a commission by the purchaser. 3. Exporters that buy and sell for their own accounts a) Export Merchants: Purchase products directly from the manufacturer and then sell, invoice and ship them in their own names. No direct dealings with the manufacturer.

3. Exporters that buy and sell for their own accounts Cont. b) Sometimes called piggyback exporters. Cooperative Exporters: Established international manufacturers that export other manufacturers’ goods as well as their own. There are three types of cooperative exporters. c) Webb-Pomerene Associations They are organizations of competing firms that have joined together for the sole purpose of export trade.

4) Exporters That Purchase for Foreign Users and Middlemen. Large Foreign Users, such as mining, petroleum and international construction companies, buy for their own use overseas. Export Resident buyers perform essentially the same functions as export commission agents. They are generally more closely associated with a foreign firm.

Direct Exporting There are four basic types of overseas middlemen from which to choose: 1. Manufacturers’ agents: Independent sales representatives of various noncompeting suppliers. 2. Distributors: Independent importers that buy for their own account for resale. 3. Retailers: Especially of consumer products , are frequently direct importers. 4. Trading Companies: Firms that develop international trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa. For example: Wholesale Institutions. l