Chapter 9 Market Entry and Servicing Strategies

1. Chapter 9Market Entry and Servicing Strategies John S. Hill

2. Chapter Outline • Introduction: Exporting Strategies • Contractual Forms of Market Entry • Investment Options for Servicing Foreign Markets • Matching Market Servicing Strategies to Environmental and Corporate Needs

3. Chapter Outline: Market Entry and Servicing Strategies Market Entry and Servicing Strategy • Exporting Strategies • Indirect Exporting • Direct exporting • Contractual Methods of Market Entry & Servicing • Licensing • Franchising • Contract manufacturing • Co-production • Investment Options • International Joint-Ventures • Mergers & Acquisitions • Greenfield Operations Matching Market Entry and Servicing Strategies to Environmental & Corporate Needs

4. Exporting Strategies • Indirect Exporting and Use of Trading Companies • Direct Exporting

5. Export Strategies • Indirect Exporting and Use of Trading Companies • Indirect exporting uses third party intermediaries • US Trading Companies and Associations: ETC (Export Trading Companies) & WPA (Webb-Pomerene Associations ) • Taiwanese Trading Companies: independent producers and suppliers • Mainland China Trading Companies: industry-centered • Japanese Trading Companies, “big nine” sogo shosha, over 1000 overseas offices, annual turnover tops $350 billion

6. Export Strategies • Direct Exporting • For small and medium sized firms, cheap and flexible • For large international firms, exporting/importing are vital parts of international operations • Key elements in global company supply chains for material supplies and distribution of final products • International firms account for 2/3 world trade

7. Contractual Forms of Market Entry • Three Major Types of Agreements • Management Contracts • Contract Manufacturing • Co-production Agreements

8. Contractual Forms of Market Entry • Three Types of Most Popular Agreements • Licensing • Allowing foreign-based firm use of production processes, marketing logos, trademarks or brand names for a defined time period in specific market and for a pre-specified royalty fee • Danisco Cultor in Asia: low cost manufacturing after patent expiry • Ferrari Motor Sports: publicize brand through clothing • Umbro: low cost way tt compete with Adidas and Nike

9. Contractual Forms of Market Entry • Three Major Types of Agreements • Franchising • Franchisees given rights for production or marketing of the product; considerable control exerted over both the production processes and marketing strategy • McDonalds, KFC and Pizza Hut • Hyatt and Holiday Inn, require up to $100 million in real estate and capital expenditures per hotel

10. Contractual Forms of Market Entry • Three Major Types of Agreements • Franchising • Controlling Foreign Franchisees • Concentrating ownership via trusted master franchisers • Diluting ownership: many independent operators

11. Contractual Forms of Market Entry • Three Types of Most Popular Agreements • Master Franchising • Individuals supervise and develop a number of franchises within a country or region • HFC, a leading franchiser of brand name hotels (e.g., Howard Johnson, Day’s Inn, Ramada), residential real estate (Century 21, Caldwell Banker, ERA) and rental cars (Avis)

12. Contractual Forms of Market Entry • Dealing with Local Market Environments • Archaic legal frameworks and bureaucracies • Political Unrest: dependencies on local businesspeople and buoyant local economies • Cultural obstacles: culturally sensitive foods industries where menus are adapted

13. Contractual Forms of Market Entry • Other Contracts and Agreements • Management Contracts, international companies, for a fee, train local employees and manage foreign-based facilities for a prescribed time period (hotels) • Contract Manufacturing, foreign firms using specific materials and/or processes to manufacture products or provide services for third party companies. May be home-market or foreign manufacture; flexibility advantages but control disadvantages • Co-Production Agreements, manufacturing joint ventures, with partners retaining their independent marketing and distribution rights

14. Investment Options for Servicing Foreign Markets • International Joint Ventures (IJVs) • Mergers and Acquisitions (M&A) • Greenfield Operations

15. Investment Options for Servicing Foreign Markets • International Joint Ventures (IJVs): Definition & Key Decision Areas • International corporations and local firms join forces to share ownership and management responsibilities in specially created enterprises • Equity Structure, control over IJV operations • Technology Transfer Arrangements, ‘the best’ technologies v.s. those matching market needs • Asset Valuation problems, value land, buildings, equipment and intangible assets (good will, brand names, etc.)

16. Investment Options for Servicing Foreign Markets • International Joint Ventures (IJVs) • Divisions of management responsibility, ‘who is really in control?’ • Financial Policy and Strategic Objectives, dividend and profit reinvestment/repatriation policies • Blending of global corporate objectives with local goals, manufacturing for other subsidiaries, allocating export rights, and pricing issues • Cultural problems and changing relationships

17. Investment Options for Servicing Foreign Markets • Mergers and Acquisitions (M&A) • Over 75 percent (or over $866 billion) were M&A in the $1.2 trillion equipment and management assets over 1999-2000; gives quick access and impact in highly competitive markets • Seven types of companies in M&A • Carnivores: M & A an everyday function. Nestle, Unilever, Electrolux and GE • Dairy Farmers: buy and sell businesses to increase shareholder value. Hanson • Vegetarian: infrequent opportunistic acquirers. Sony’s and Matsushita’s purchase of Hollywood

18. Investment Options for Servicing Foreign Markets • Mergers and Acquisitions (M&A) • Seven types of companies in M&A • White Hunters: frequently go for firms that are bigger than they are. UK supermarket trolley maker WPP’s takeover of US advertising agency giant J. Walter Thompson • Gentleman Shooters: large takeovers after exhaustive research. BMW’s takeover of British auto firm Rover • Cross-Breeders, leading national companies to form regional (or global) powerhouses. Sweden’s ASEA and Brown-Boveri of Switzerland in heavy electrical equipment • Global mega-mergers, to build critical mass and presences in the international markets. Renault’s $5.4 billion investment in Japan’s number 2 car maker, Nissan.

19. Investment Options for Servicing Foreign Markets • Implementing M & A Strategies • Evaluation of Prospects • Financial analysis • Strengths-weaknesses-opportunities-threats (SWOT) • Cost and value chain analysis • Competitive analysis

20. Investment Options for Servicing Foreign Markets • Implementing M & A Strategies • Post Acquisition Strategies • Stand-alone policies: leave the acquired company as it is; little interference • Integration strategies: into parent company operations to reap financial, manufacturing, marketing synergies • M&A Assessment: was it worth it and did we execute it well?

21. Investment Options for Servicing Foreign Markets • Greenfield Operations • Build foreign subsidiaries to suit their needs • Advantages • Need not deal with existing managements and facilities • Start fresh with the firm’s own technologies, management styles and corporate cultures • Complete control of subsidiary development and market strategies

22. Investment Options for Servicing Foreign Markets • Greenfield Operations • Disadvantages • Must build in-market relationships with suppliers, distributors from scratch • Competitors have time to adjust their strategies and prepare for a new rival • The risks of making major resource commitments and of financing losses until facilities reach their full market potential

23. Investment Options for Servicing Foreign Markets • Greenfield Operations • Conditions favoring: • Financing needs are low • Markets are developing slowly and industry competition levels are low • Leading edge products and process technologies; can guard against intellectual property theft • Global brands and reputations are advantages • Strong corporate cultures are keys to corporate success

24. Investment Options for Servicing Foreign Markets • Greenfield Operations • Country Selection Criteria • Proven manufacturing capabilities in the global context • Market potential • Competitor presences (they are there, why aren’t we?) • Favorable environment: no major operating problems

25. Investment Options for Servicing Foreign Markets • Greenfield Operations • Site Location Within the Country determined by: • Government location incentives (undeveloped regions) • Economically significant centers (customers) • Availability of qualified personnel • Essential resources are available • Transportation and infrastructures must be adequate

26. Investment Options for Servicing Foreign Markets • Greenfield Operations • Siting Research and Development Capabilities • Historical patterns: home market-based • Current R&D strategies • Research labs in traditional fields: located in major markets or ‘competence regions’ (e.g. silicon valley) • Development labs: product adaptations to local needs • Facilities in new emerging areas: Latin America, Asia • Managing the R&D Site: size is important; and leadership (reputation, connections)

27. Matching Market Servicing Strategy to Environmental and Corporate Needs • External Factors • Internal Factors

28. Matching Market Servicing Strategy to Environmental and Corporate Needs • External Factors • Global industry analyses: Countries with significant market sizes and high market growth • Market environment analyses: less problematic for experienced firms; essential for newcomers • Competitive Factors: alert firms to competitor presences and what facilities rivals have in particular markets; competitive advantages can accrue (e.g. producing and customizing in-market to counter import competition)

29. Matching Market Servicing Strategy to Environmental and Corporate Needs • Internal Factors • Corporate Objectives • Learning and market feedback: build up global expertise • Flexibility: the ability to switch resources quickly in response to corporate and marketplace needs (exporting) • Control over products and manufacturing processes

30. Matching Market Servicing Strategy to Environmental and Corporate Needs • Internal Factors • Corporate Resources • Managerial resource scarcity may be countered by use of third party expertise • International management expertise: necessary for direct exporting; less so for contractual modes of market entry (licensing, franchising, turnkey operations, etc); essential for investments • Marketing and operating costs: cheaper for indirect exporters, necessary for all entry strategies • Competitive advantage: firms seek to leverage home market advantages into foreign country environments; brand/corporate reputation, service, customization

31. Key Points • Many types of entry strategies • Exporting (direct/indirect) • Contractual Methods • Investment Options • Site Selection • R&D Facilities • Strategies to match company’s external and internal needs