Selecting and Managing Entry Modes

1. Selecting and Managing Entry Modes

2. 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 • Ownership advantages of the company • Location advantages of the market • International experience • Potential size of the market • Ability to develop differentiated products 17-3

3. Alternative Operating Modes for Foreign Market Expansion

4. Developing an Export Strategy Step 1 Step 2 Step 3 Step 4 Identify a potential market Match needs to abilities Initiate meetings Commit resources

5. Degree of Export Involvement Direct exporting (sell to buyers) Indirect exporting (sell to intermediaries) • Sales representatives • Distributors • Agents • Export management companies • Export trading companies

6. 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 17-5

7. 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 17-6

8. Phases of Export Development 17-7

9. 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

10. 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 17-9

11. Avoiding Export Blunders Conduct market research Obtain export advice Consider a freight forwarder

12. 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

13. Forms of Countertrade Barter Counterpurchase Offset agreement Switch trading Buyback Direct exchange without money Sale to a country in return for promise of future purchase from it (reciprocal) Offset a hard-currency sale to a nation with future hard-currency purchase. (part of exported good is produced in the importing country) Sale by a company of an obligation to purchase from a country Export of industrial equipment in return for products the equipment produces

14. 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

15. 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 17-15

16. Export/Import Financing

17. High-Risk Approaches • Open account • Exporter ships • merchandise and • later bills importer • Advance payment • Importer pays exporter • for merchandise • before it ships

18. Documentary Collection Bank acts as intermediary without accepting financial risk Draft (bill of exchange) Bill of lading Document that orders an importer to pay an exporter a specified sum of money at a specified time Contract between an exporter and shipper specifying destination and shipping costs for merchandise

19. Documentary Collection Process

20. Letter of Credit Importer’s bank issues a document stating that the bank will pay the exporter when exporter fulfills document’s terms • Irrevocable • Revocable • Confirmed

21. Letter of Credit Process

22. Advantages • Finance expansion • Reduce risk • Reduce counterfeits • Upgrade technologies Disadvantages • Restrict licensor’s future • Reduce global consistency • Lend strategic property Licensing Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specified time

23. 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

24. Advantages • Low cost and low risk • Rapid expansion • Local knowledge Disadvantages • Cumbersome • Lost flexibility Franchising Company (franchiser) supplies another (franchisee) with intangible property over an extended period

25. Motives for Franchising • Economies of scale • Standardization • Central purchasing • High identification through promotion • Learning processes • Effective cost controls 14-12

26. 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

27. 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 • Export financing • Managerial and technological quality • Expertise • Turnkey operator are specialists in working in remote areas often 14-14

28. Advantages • Firms specialize in core • competency • Nations obtain infrastructure • projects Disadvantages • Politicized process • Create competitor Turnkey Project Company designs, constructs and tests a production facility for a client

29. Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company • Advantages • Day-to-day control • Coordinate subsidiaries • Disadvantages • Expensive • High risk

30. Strategic Alliances & Objectives 14-7

31. 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

32. 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 • Partner conflict • Lose control

34. Entry Modes: Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience

35. Risk, Control, Experience