What are the three 3 basic decisions a firm need to take when entering other markets?

Introduction to Topic 7 Discussion Notes

The Topic Discussion Notes provide you with a brief summary of the essential concepts to master in each Topic and the major Learning Outcomes.

Specifically, each of the key concepts in the relevant chapters for each Topic are summarised briefly. 

In addition, there are brief summaries of each slide related to the Course Slides for each chapter. You will find that the summaries for each slide provide you with an essential background of knowledge, ideally after you have read each chapter. In this way it enables you to test your knowledge, as well as laying a foundation to build on and deepen your knowledge of international business by reading many of the of the Course Journal Articles. While they are optional reading, reading the Course Journal Articles will assist you to have a much broader, more contemporary and practical knowledge base from which to apply your knowledge now and in the future.

Note that the Course Slides are located on the Learnonline site and the Journal Articles are available through the e-Library Resources for this Course.

 Chapter 15: Entry Strategy and Strategic Alliances

Learning objectives

 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. 

 Compare and contrast the different modes that firms use to enter foreign markets. 

 Identify the factors that influence a firm’s choice of entry mode. 

 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy. 

 Evaluate the pros and cons of entering into strategic alliances.

 This chapter is concerned with three closely related topics: the decisions of which markets to enter, when to enter those markets, and on what scale.

When a firm that wishes to enter a foreign market, it has several options, including exporting, licensing or franchising to host country firms, setting up a joint venture with a host country firm, or setting up a wholly owned subsidiary in the host country to serve that market. Each of these options has its advantages and each has its disadvantages.

Strategic alliances have become more frequent. They may be seen as one way for firms to enter into cooperative agreements between actual or potential competitors. The term "strategic alliances" is often used rather loosely to include a wide range of arrangements between firms, including cross-share holding deals, licensing arrangements, formal joint ventures, and informal cooperative deals.

The magnitude of the advantages and disadvantages associated with each entry mode are determined by a number of different factors, including transport costs and trade barriers, political and economic risks, and firm strategy.

The opening case explores the entry strategy used by Starbucks, the popular Seattle-based coffee company, to enter markets in Europe and Asia. The closing case explores how General Motors focused on China as its next growth market. The company used a joint venture strategy in the market and by 2010 sold more cars in China than in the United States. As of 2015, China remains GM’s largest market in terms of vehicles sold.

LECTURE OUTLINE

The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point.

Slide 15-2 Basic Entry Decisions

Firms expanding internationally must decide which markets to enter, when to enter them and on what scale, and which entry mode to use. Entry modes include exporting, licensing or franchising to a company in the host nation, establishing a joint venture with a local company, establishing a new wholly owned subsidiary, or acquiring an established enterprise.

Slide 15-3 What Influences the Choice of Entry Mode?

Several factors affect the choice of entry mode including transport costs, trade barriers, political and economic risks, costs, and firm strategy.

Slides 15-5 and 15-6 Which Foreign Markets?

The choice of foreign markets will depend on their long-run profit potential.

Slides 15-6 through 15-8 Timing of Entry

Once attractive markets are identified, the firm must consider the timing of entry. Entry is early when the firm enters a foreign market before other foreign firms, and late when the firm enters the market after firms have already established themselves in the market.

First-mover advantages are the advantages associated with entering a market early. First-mover disadvantages are disadvantages associated with entering a foreign market before other international businesses.

Slide 15-9 Scale of Entry and Strategic Commitments

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry. Large-scale entry may keep rivals out and may stimulate indigenous competitive response. Small-scale entry allows time to learn about the market and reduces risk exposure.

Slide 15-10 Which Way Is Best?

There are no “right” decisions when deciding which markets to enter, and the timing and scale of entry, just decisions that are associated with different levels of risk and reward.

Slide 15-11 Think Like a Manager: Analyze Jollibee’s Entry Strategy

Slides 15-12 through 15-14 Entry Modes The six entry modes are exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries.

Slide 15-15 Exporting

Exporting avoid costs of investing in new location and may help achieve experience curve and location economies. Exporting faces challenges from tariff barriers, transportation costs, control over marketing, and local low-cost manufacturers.

Another Perspective: The Small Business Administration {http://www.sba.gov/category/navigation-structure/exporting-importing} provides information companies should know before they begin exporting. Students can click on the various topics to learn more about export financing, export plans, dealing with risk, and so on.

Slide 15-16 Turnkey Projects

Turnkey projects allow a company to get a return on knowledge assets and are less risky than conventional FDI. The disadvantages are that there is not long-term interest in the location, the project may create a competitor, and if process technology is involved, the firm may be selling a competitive advantage.

Slide 15-17 Licensing

Licensing does not bear the costs and risks of investment and avoids political/economic restrictions in a country.

Slide 15-18 Franchising

Franchising reduces costs and risks, avoids political and economic restrictions, and allows for quicker expansion. Disadvantages include loss of control over quality.

Slides 15-19 and 15-20 Joint Ventures

Joint ventures benefit from the local partner's knowledge, shared costs, and reduced risk.

Disadvantages include loss of control over technology and conflict between partners.

Slide 15-21 Wholly Owned Subsidiaries

Wholly owned subsidiaries offer the most control and the highest level of risk and cost.

Slide 15-22 Selecting an Entry Mode

The optimal choice of entry mode involves trade-offs.

Slide 15-23 Core Competencies and Entry Mode

The optimal choice of entry mode for firms pursuing a multinational strategy depends to some degree on the nature of their core competencies.

Slide 15-24 Pressures for Cost Reductions and Entry Mode

When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries.

Slides 15-25 and 15-26 Greenfield Ventures or Acquisitions

Firms can establish a wholly owned subsidiary in a country through a greenfield strategy (building a subsidiary from the ground up) or through an acquisition strategy.

Slide 15-27 Pros and Cons of Acquisitions

Pros: quick, preemptive, possibly less risky. Cons: disappointing results, overpay, optimism/hubris, culture clash, failure of synergies

Slide 15-28 Pros and Cons of Greenfield Ventures

Greenfield ventures allow the firm to build the subsidiary it wants, but it is slow, risky, and may involve preemption by competitors. Acquisition is quicker, so a consideration if there are competitors ready to enter.

Slide 15-29 Strategic Alliances

Strategic alliances refer to cooperative agreements between potential or actual competitors.

Slide 15-30 The Advantages of Strategic Alliances

Strategic alliances facilitate entry into a foreign market, allow firms to share the fixed costs (and associated risks) of developing new products or processes, bring together complementary skills and assets that neither partner could easily develop on its own, and can help a firm establish technological standards for the industry that will benefit the firm.

Strategic alliances can give competitors low-cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives.

The firm must be certain that the partner is one that can help the firm achieve its goals and not act opportunistically to exploit the alliance purely for its own ends.

Another Perspective: Virgin Atlantic and Delta Airlines have formed a strategic alliance to help Virgin Atlantic achieve its growth objectives. To learn more, see {http://news.delta.com/index.php?s=43&item=1822}.

Slides 15-31 through 15-31 Making Alliances Work

The success of an alliance is a function of partner selection, alliance structure, and manner in which the alliance is managed.

Another Perspective: The Association of Strategic Alliance Professionals {www.strategic-alliances.org/} is an organization devoted to the formation of successful strategic alliances. The organization is supported by a number of well-known global companies and provides information on the involvement of the companies in strategic alliances.

 Chapter 16: Exporting, Importing and Countertrade

Learning objectives

 Explain the promises and risks associated with exporting. 

 Identify the steps managers can take to improve their firm’s export performance. 

 Identify information sources and government programs that exist to help exporters. 

 Recognize the basic steps involved in export financing. 

 Describe how countertrade can be used to facilitate exporting. 

Previous chapters have presented exporting as just one of a range of strategic options for profiting from international markets. This chapter looks more at the nuts and bolts of how to export.

Exporting is not just for large enterprises; many small firms have benefited significantly from the moneymaking opportunities of exporting.

The volume of export activity in the world economy is increasing as exporting has become easier. The gradual decline in trade barriers under the umbrella of GATT and now the WTO (see Chapter 5) along with regional economic agreements such as the European Union and the North American Free Trade Agreement (see Chapter 8) have significantly increased export opportunities. At the same time, communication and transportation technologies have alleviated the logistical problems associated with exporting.

Firms are increasingly using the Internet and international air express services to reduce the costs of exporting. Consequently, it is no longer unusual to find small companies that are thriving as exporters.

The opening case follows the experiences of LuLu’s Desserts, a company in Torrance, California, that expanded its business to international markets in an effort to grow the company. The closing case explores the experiences of Two Men and a Truck, a U.S.-based moving company that has found global success through franchising.

LECTURE OUTLINE 

The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point slide.

Slides 16-2 and 16-3 Why Export?

Exporting firms need to

 identify market opportunities

 deal with foreign exchange risk

 navigate import and export financing

 understand the challenges of doing business in a foreign market 

Slide 16-4 The Problems and Pitfalls of Exporting

Exporting offers the opportunity to take advantage of a bigger market, and the economies of scale that come with producing for a bigger market. However, it is also a more complex market.

Common pitfalls include poor market analysis, poor understanding of competitive conditions, a lack of customization for local markets, a poor distribution program, poorly executed promotional campaigns, problems securing financing, a general underestimation of the differences and expertise required for foreign market penetration, and an underestimation of the amount of paperwork and formalities involved.

Slide 16-5 Improving Export Performance

There are various ways to gain information about foreign market opportunities and avoid the pitfalls associated with exporting.

Another Perspective: The UK Trade and Investment office is devoted to helping companies develop their export business. The web site is available at {http://www.ukti.gov.uk/home.html?guid=none}. Click on “Business Opportunities” to see a sample of a trade lead, or click on “Country Report” to see the types of information available in a typical report on a specific country.

Slide 16-6 Getting Information

A big impediment to exporting is the simple lack of knowledge of the opportunities available. To overcome ignorance firms need to collect information.

Another Perspective: Your students may wonder how firms U.S. firms find buyers in foreign countries. To find foreign customers, exporters often use “trade leads” that are provided by organizations dedicated towards the activity of matching “buyers” and “sellers” in an international context. An example of a site that provides trade leads is the Export.gov at {http://www.export.gov/index.asp}.

The U.S. Department of Commerce is the most comprehensive source of export information for U.S. firms.

Another Perspective: Students may want to explore the U.S. Department of Commerce’s web site {http://www.commerce.gov/} and click on “Trade Opportunities for U.S. Businesses.”

Another Perspective: The Small Business Administration (SBA) also has an extensive web site {http://www.sba.gov/} with information about exporting to different countries, contacts and leads, and so on.

Slides 16-7 and 16-8 Utilizing Export Management Companies

Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms.

Another Perspective: The FITA Directory of Export Management Companies web site {http://fita.org/} provides information on export management companies, and also trade leads and international market research.

Slide 16-9 Reducing the Risk of Exporting

Firms can reduce risk by carefully choosing their export strategy, and following some basic guidelines.

Firms should

 hire an EMC or export consultant to help identify opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting

 focus on one, or a few markets at first

 enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failures

 recognize the time and managerial commitment involved

 develop a good relationship with local distributors and customers

 hire locals to help establish a presence in the market

 be proactive

 consider local production. 

Another Perspective: A great web site to visit to determine whether a company is ready to export is the International Trade Centre, run by UNCTAD/WTO. If you go to the site {www.intracen.org} you can use the market analysis tools to gauge export readiness. Click on “Market Info & Tools,” then on “Market Analysis Tools” to access online tools.

Slide 16-10: Think Like a Manager: Compete with 3M

Slides 16-11 and 16-12 Export and Import Financing

Firms engaged in international trade face a problem—they have to trust someone who may be difficult to track down if they default on an obligation. Including a third party in a transaction adds an element of trust to the relationship.

Another Perspective: For more information on the challenges of export and import financing for small businesses, consider {http://smallbiztrends.com/2012/02/small-business-news-reveals-opportunities-challenges.html}.

Slide 16-13 Letter of Credit

A letter of credit is issued by a bank at the request of an importer and states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents.

Slides 16-14- and 16-15 Drafts

A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time.

Slide 16-16 Bill of Lading

The bill of lading is issued to the exporter by the common carrier transporting the merchandise.

Slide 16-17 A Typical International Trade Transaction

The typical international trade transaction involves 14 steps.

Slides 16-18 and 16-19 Export Assistance

There are two forms of government-backed assistance available to exporters:

1. Financing aid is available from the Export-Import Bank

2. Export credit insurance is available from the Foreign Credit Insurance Association

The Export-Import Bank (Ex-Im Bank) is an independent agency of the U.S. government that provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.

Export credit insurance protects exporters against the risk that the importer will default on payment. In the U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FICA).

Slide 16-20 Countertrade

Countertrade refers to a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money.

Countertrade began in the 1960s primarily in the Soviet Union and Eastern bloc countries. Its popularity increased during the 1980s when many developing countries that were short of hard currencies used countertrade instead. More recently, its use increased after the 1997 Asian financial crisis.

Slides 16-21 through 16-24 Types of Countertrade

There are five distinct versions of countertrade:

1. barter

2. counterpurchase

3. offset

4. compensation or buyback

5. switch trading

Slides 16-25 and 16-26 Pros and Cons of Countertrade

The main attraction of counter trade is that it gives a firm a way to finance an export deal when other means are not available.

Countertrade is unattractive because it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.

Copyright © 2017 McGraw-Hill Education. 

Adapted for MBA BUSS 5251 International Business

for the purpose of individual study and course preparation.

What are the 3 main options for entering a new market?

What are the basic entry decision to enter in the foreign market?

What factors do firms entering foreign markets need to consider?