Professional Documents
Culture Documents
Licensing: Giving a company in the target market permission to manufacture a product in return for payment
Franchising: Giving a foreign company in the target market permission to conduct business under a
trademarked name in return for payment
Subcontracting: Outsourcing contracted work to a third party company in the foreign market
Joint venture: Partnering with a foreign company to form a legally separate organization
To maximize profits
To acquire resources
Do company employees have sufficient knowledge of international trade, including import and export
regulations?
Are there sufficient resources to support market entry? Resources can include additional employees,
production facilities and finances.
What are our strengths and weaknesses? Internal strengths and weakness can be linked to external opportunities
and threats by performing a SWOT analysis.
SWOT Analysis Matrix
SWOT analysis
Strengths-S
Weaknesses-W
List strengths
List weaknesses
SO strategies
OpportunitiesO
These strategies will
pursue opportunities that
List
match the companys
opportunities
strengths.
ST strategies
Threats-T
List threats
WO strategies
These strategies will
overcome weaknesses to
pursue opportunities
WT strategies
These strategies will aim to
minimize weaknesses and
defend against threats.
Strategic objective to maximize profit: Market is large and has strong customer demand
Strategic objective to gain market share: Product is new to the market or there are few competitors
Strategic objective to improve cash flow: Market is relatively undeveloped and customers are appreciative of
foreign goods
Strategic objective to reposition the business: Customers are not familiar with the existing business
Strategic objective to acquire resources: Market contains the skills and resources required
Researching countries and customers: Small companies usually conduct a substantial amount
of research using the Internet.
Free and reliable sites:
Information databases
Government agencies, such as the U.S. Department of Commerce and Department of Foreign Affairs and
International Trade Canada
Companies can also obtain invaluable information about foreign markets by attending trade shows or trade fairs.
Trade visits are also a valuable way of determining whether a market is a suitable one to try and enter.
Activity: Report
The CIA World Factbook is an invaluable resource for companies starting to investigate markets.
Go to the CIA World Factbook site:
www.cia.gov/library/publications/the-world-factbook/index.html
Select one country and use the information on the site to prepare a short report containing the following
information:
The usefulness of the information on the site.
What you learned about market conditions in the country.
What additional information you would need to determine whether a market was a suitable one for a
company to enter.
Post your report to the main discussion forum. Review your colleagues responses and reply to any that
you find interesting. Please remember to be courteous.
Researching competitive market entry strategies: Companies must analyze the industry, the market
and its competitive environment.
Michael Porter identified a framework of five forces that can be used to formulate a competitive strategy:
Political and regulatory barriers, such as the requirement for export licenses or the existence of trade
sanctions
Likelihood
Impact
1
2
3
In the same manner, companies should estimate the benefits that a proposed course of action might bring and the
likelihood of achieving those benefits. For each of these benefits, a company should estimate the likelihood of
obtaining this benefit and the impact on the company. The benefit analysis can be used to map out another matrix.
Each market can then be compared in terms of risks and benefits.
Activity: Think About It
To conduct a risk analysis, companies must try and identify all possible and realistic risks associated
with a market.
Using the CIA World Factbook information you gathered for report, list all the possible risks associated
with your chosen country that you can think of.
Post your responses to the main discussion forum. Review your colleagues responses and reply to any
that you find interesting. Please remember to be courteous.
These activities should take you about three hours to complete.
Companies must decide on the market entry strategy that will be most likely to succeed for their given market and list
the steps that must be performed to put this strategy into action.
Slide 7: Summary
Successful market entry depends on careful planning of the where, when and how of market entry.
Markets must be chosen carefully.
Companies must also select a mode of market entry that will best match their strategic objectives.
Methods of market entry include those based on trading and those based on investment:
Direct exporting
Indirect exporting
Licensing
Franchising
Subcontracting
Greenfield investments
Subsidiaries
Strategic planning enables a company to match entry strategies to corporate objectives, resources and capabilities.
Activity: Case Study
Now that youre familiar with the subject matter of this chapter, please read the following case study.
Slide 8: Exercises
Exercises
Exercise 1
Each company will have different strategic objectives for entering markets. Based on the information in
this chapter, what type of market should the following companies consider moving into?
If you work in a company that has ideas about a market to enter, discuss whether this market will meet
Strength/Opportunity
Weaknesses/Opportunity
Strength/Threats
Weaknesses/Threats
If you work for or own a company, you can prepare the SWOT analysis for your company instead of a
well-known one.
Post your responses to the main discussion forum. Review your colleagues responses and reply to any
that you find interesting. Please remember to be courteous.
These activities should take you about one hour to complete.
Economies of scale
Product differentiation
Capital requirements
Switching costs
Government policies
These sources can generate a wide range of market entry barriers that can be divided into the following types:
Political and legal barriers, such as sanctions, tariffs, political instability and industrial standards
Economic barriers, such as unfavourable exchange rates, sunk costs and high development costs
Business infrastructure barriers, such as lack of business infrastructure and existence of monopolies
Activity: Think About It
Some of the sources of market entry barriers are obvious, such as government policies. However,
others are not so obvious. How might economies of scale generate entry barriers to markets?
Post your ideas on the main discussion forum. Review your colleagues responses and reply to any that
you find interesting. Please remember to be courteous.
This activity should take you about 20 minutes to complete.
Trade sanctions: Trade penalties applied against nations in order to persuade them to change their
behaviour or penalties. They include import or export licenses, higher rates of duties on imported goods and
import quotas.
Economic sanctions: Measures that prohibit or severely limit trade with another nation. They include import
or export bans and embargos.
Strategies to consider
When confronted with this type of barrier, companies can consider the following strategies:
Develop value-added activities in the target market, such as after sales service, that are not subject to tariffs
and that will enhance the value of a more expensive product.
Start producing goods in the target market to avoid the need for importing.
Partner with a company in the target market that will produce the goods at their facilities.
Activity: Report
Import quotas and tariff rates are very important entry barriers to be aware of. The existence of these
barriers in a target market can be researched easily using the internet.
Go to the following website:
www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm
Select one of the countries listed as being a member of the WTO. If you work for a company moving
into international trade, select a country that is a target market.
Scroll down to the Disputes section for your chosen market. Select an interesting dispute regarding an
import and read about it.
Prepare a short report about the import dispute for that nation. Post your report to the main discussion
forum. Review your colleagues responses and reply to any that you find interesting. Please remember
to be courteous.
This activity should take you about 90 minutes to complete.
Absolute quotas limit the amount of a product that can be imported during a specified time.
Tariff-rate quotas permit a certain amount of a restricted good to be imported at a reduced or normal rate of
duty. Any amount over the quota has raised duties applied to it, making it far more expensive.
Strategies to consider
If import quotas will be a market entry barrier, companies can consider the following strategies:
Develop value-added activities in the target market to increase its attractiveness to foreign purchasers
Adapt the product to give it more appeal and justify the enhanced price
Set up facilities in the target market to obtain subsidies for domestic companies
Trade blocs
Trade blocs are intergovernmental associations that promote trade activities in certain areas of the world. There are
various levels:
Preferential Trading Arrangement (PTA): These are agreements that involve preferential trading conditions
between member countries relative to the trading conditions imposed on non-members.
Free Trade Area (FTA): NAFTA is a regional PTA. Member countries apply no tariffs to imported goods from
other members.
Economic union: A common market with joint economic as well as trade policies.
Strategies to consider
If your company will face a disadvantage in a chosen market because it is not part of a trade bloc, consider the
following strategies:
Partner with a company in a preferred trading relationship with the chosen market or in the chosen market.
Set up a subsidiary company in the market or one that has a preferred trading relationship.
Invest in production facilities in the chosen market to avoid the need for exporting.
Adapt your product or service to enhance its perceived value and justify the increased price.
Political instability
Frequent changes in government, accompanied by reversals in policy, can undermine business confidence and make
it more difficult for companies to obtain funding.
Major U.S. Economic Sanctions:
Strategies to consider
If research indicates that a chosen market is politically unstable, companies can consider the following strategies:
Request cash or an irrevocable confirmed letter of credit up front before delivering goods or services.
Regulatory standards
Because different governments have different standards, they can act as a barrier to market entry. In some cases, the
barrier occurs because of differing systems.
Companies wishing to enter a market should ensure that their products meet all required standards.
Foreign direct investment policies
Governments in different countries have varying policies about foreign investment in their nations industries and
infrastructure.
Companies that are considering an investment strategy for a particular foreign market must research government
policies carefully and consult with a trade lawyer for advice on FDI legislation.
Industrial policies
In many countries, governments use industrial policies to restrict and control new entrants profit margins and level of
competition. These policies include:
Categorization of industries
Companies must check that a target market permits foreign companies to enter and conduct business and that the
policies governing trade will not limit actions or reduce profits.
Government efficiency and corruption
The way in which a country's government operates can also act as a market entry barrier. Efficient governments are
easier for foreign companies to work with. Countries run by corrupt governments can present market entry barriers in
the form of excess legislation and the expectation of bribes.
Companies must carefully research how the government in a target market functions. If research identifies that a
government is inefficient and corrupt, a company must carefully consider whether the other advantages of the market
will outweigh this serious entry barrier.
Attempt to gain the best possible understanding of the consumers in its target market
A lack of infrastructure
Climate
Countries affected by extremes of temperature, high winds, rainy seasons, dryness or humidity require alterations in
design and packaging to withstand the effects of climate.
Environmental legislation
Each market has different environmental protection laws and regulations that regulate emissions of chemicals, land
use, energy consumption, trade in endangered species, transportation of hazardous goods, and waste disposal
practices.
Sunk costs (expenses necessarily incurred to enter a new market that cannot be recouped if the market
entry fails)
Fluctuating currency
High inflation
Strategies to consider
Companies can consider the following strategies to deal with economic barriers:
A monopoly, which occurs when one company is the main provider of a product or service in a market
Poor legal protection of intellectual property (copyrights, patents, trademarks) and fair and effective dispute
settlement mechanisms
Bribery and corruption
Strategies to consider
To respond to business environment market entry barriers, companies can:
Partner with local business people who do understand the system and can work it to commercial advantage.
Limit their exposure in countries that lack legal safeguards, especially when they have valuable intellectual
property
Activity: Test Your Knowledge
Question 1: What is another name for competition law?
a.
Antitrust law
b.
Monopolies law
c.
Tariff law
d. Subsidies law
Question 2: What are the two main types of import tariff?
a.
b.
c.
d.
Answers: A, D
Political and legal barriers, such as government policies, import tariffs, and sanctions
Environmental barriers, such as geographic distances, climate, and presence of natural resources
Companies must be aware of all the issues that might make market entry more difficult so that they can either select
a different market to target or plan a strategy to minimize the barriers effect.
Activity: Case Study
Now that youre familiar with the subject matter of this chapter, please read the following case study.
Whether it is restricted
Post your findings on the main discussion forum. Based on your findings, discuss whether the company faces a
considerable market entry barrier in your selected market. Consider how much your products price in the target
market will be affected by your additional expenses.
Exercise 2
A small company might encounter some of the following barriers when entering a new market. For each situation,
consider a strategy that the company might consider to minimize the effect of the barrier:
Producers in the target market receive a subsidy enabling them to sell their product at a price ten percent
lower than your company would have to charge.
All products in the target market must have ingredients listed in the foreign language.
Customs clearance in the target market is notoriously slow unless bribes are paid to officials.
The only competitor in the target market has been in business for 25 years.
Iceland
Germany
Bermuda
Finland
You can communicate using e-mail, IM, or the online discussion forum.
Post your findings on the main discussion forum.
For each activity, review your colleagues responses and reply to any that you find interesting. Please remember
to be courteous.
These activities should take you about four hours to complete.
With a target market selected, a company must decide how it will deliver its goods or services to potential customers.
Different markets and industries will require a different approach.
To select the best strategy, companies must consider:
Element to
consider
Questions to ask
Company goals
What are our objectives for entering this market? Which strategy will best
meet these goals?
Size of
company
Does our size mean that some strategies might not be possible?
Resources
Are there strategies that we cannot use because of lack of resources, such
as direct investment?
Product or
Service
Which strategy will align best with the product or service we are offering?
Remittance
How will each strategy impact the price we can obtain for our product and
service? For example, will direct importing be so expensive for us that our
product will have to be overpriced?
Competition
What is the level of competition in the market? What entry strategy are our
competitors using? Which strategy will give us the best competitive edge?
Intermediaries
Control
How much control does our company need over activities? For example,
direct exporting enables a lot of control, indirect exporting does not.
Investment
Time
How much time is available to enter the market? Do we need a strategy that
will provide returns quickly?
Risk
What level of risk can our company face? Which strategies are the least
risky?
Flexibility
Slide 2: Exporting
Exporting is the traditional method for trading internationally. It involves goods produced by a company in one country
being delivered to another country and marketed there.
Direct exporting
Direct exporting involves a company selling goods directly to a customer in an international market. The most
important types of customer for a company involved in direct exporting include:
Importers
Wholesalers
Distributors
Retailers
Consumers
Finding customers
If a company wants to export directly to a selected market, it should contact its countrys embassy in the foreign
market and talk to the trade commissioners based there.
A company should make the following checks on potential customers:
Government procurement
Government departments in the target market can be an excellent customer for exporters. All governments put out
tenders, or requests for proposals (RFPs) to provide goods and services.
Activity: Find Out More
A good place to start looking for government tenders is on the Internet.
Choose one of the following websites that provide free information about government tenders:
Review the responses posted by your colleagues and respond to any that you find interesting.
Companies should answer the following questions before attempting to enter a foreign market using government
procurement as an export strategy:
Do we have an offering that is ready to be sold and, ideally, has already been sold commercially?
Have we identified the competition in the market so that we can challenge them effectively?
How can we adapt our marketing approach to be suitable for government procurement agents?
Business models
Some businesses have an export department that is responsible for exporting activities. Others establish sales offices
in the target market. Companies new to direct exporting should start by selling to an intermediary or by contracting an
agent.
Advantages and disadvantages of direct exporting
Direct exporting as a market entry strategy has several advantages for a company:
The company controls all its manufacturing processes and the processes are based in the companys
facilities.
A company can withdraw from the market relatively cheaply and easily if it needs to.
Companies can obtain in-depth information about trade in the target market.
Element to
consider
Suitable conditions
Company goals Strategic objectives are to maximize profits or expand market share.
Size of
company
Resources
The company must have skills and experience in dealing with exporting and
marketing overseas, or must find partners who can help with it.
Product or
Service
Any product or service can be exported, but it must be suitable for the chosen
market.
Remittance
This strategy will only be suitable if the costs that will be added to the
purchase price by shipping and insurance costs, storage fees, and duties and
taxes will not make the product too expensive.
Competition
Intermediaries
Control
Investment
The company must be able to invest substantial time and money into market
research, marketing, selling, and distribution issues.
Time
Risk
The company must be able to handle risks associated with loss of goods in
transit, non-payment for goods sent, and unsuccessful market entry.
Flexibility
Company wants the ability to exit the market more quickly than would be
possible if the company had made a direct investment in the foreign market.
Confirming houses
Piggybacking
Companies who want to engage in indirect exporting sometimes use a system called piggybacking. In piggybacking,
companies (often termed riders) use the skills, experience, or resources of a company that is more experienced in
exporting (often termed the carrier company).
Countertrade
In countertrade, payments for goods and services are made by deliveries of other goods and services as well as, or
in place of, financial payments.
One form of countertrade is counter purchase, also known as buyback. This involves a buyer agreeing to purchase a
set quantity of goods on condition that the seller purchases the buyers products in return.
Finding customers for indirect exporting
In some cases, the intermediary will contact companies. If a company wants to move into indirect exporting, it can
find customers using the following strategies:
Indirect exporting:
Is the cheapest entry strategy
Is flexible
Allows all exporting activities to be handled by intermediaries
Is low risk
Involves loss of control
Does not permit market knowledge to be obtained
Element to
consider
Suitable conditions
Company goals Strategic objectives are to maximize profits or enhance cash flow.
Size of
company
Any size of company, but especially smaller companies that cannot devote
human resources to international trade.
Resources
The company wants a market entry strategy that does not require special
resources.
Product or
Service
Remittance
The company must be happy with the remittance offered by the intermediary
company.
Competition
The level of competition in the market will not be a concern for the company.
Intermediaries
The company must be willing to deal with reputable trading houses or export
merchants. A good working relationship will be required.
Control
The company does not need to have control over production, marketing, and
selling activities. It must also not have an interest in how its product is
perceived overseas.
Investment
Time
Risk
Flexibility
Slide 6: Licensing
Licensing involves a company (known as the licensor) granting permission to a company in another country to use its
intellectual property for a defined time period.
The intellectual property can include:
Trademarked products
Copyrights
Technical assistance
Advantages and disadvantages
Licensing has the following advantages:
The licensor company benefits from the licensee companys local market knowledge.
The company has the option to expand into the market further by investing in the licensee company at a
later date.
The company can move into several markets at one time.
The licensee company might use the intellectual property provided to become a competitor company.
Intensive research and planning is required to identify the best licensee and develop a beneficial licensing
agreement.
Element to
consider
Suitable conditions
Company goals
The strategic objective is to expand market share. The company must not
require large profits from international trade.
Size of
company
Resources
Product or
Service
Remittance
Competition
Intermediaries
The company must work with a reputable law firm experienced in international
trade to negotiate and develop the license agreement.
Control
The company does not need to have substantial control over production,
marketing and selling activities.
Investment
Time
Risk
The company must be able to deal with the risk of business losses from theft
of intellectual property.
Flexibility
The company must be able to remain in the trading relationship for a set
period of time.
Slide 8: Franchising
Franchising is similar to licensing, but instead of intellectual property, the company grants permission to use its name
or trademarked goods.
There are two main forms of franchise agreement:
First generation franchise: The company purchasing the franchise obtains permission to use a name or
produce goods.
Second generation franchise: The company purchasing the franchise receives a complete business package
including instructions and directions on how it must operate, staff training, and advice.
Element to
consider
Suitable conditions
Size of
company
Resources
Product or
Service
The product or service must have a brand name or a trademark that will be
popular in an international market.
Remittance
Competition
If other companies are also selling similar franchises in the market, entry will
be more difficult. Companies must be comfortable with the possibility of
competition in the international marketplace increasing with the growing
numbers of franchisees.
Intermediaries
The company must work with a reputable law firm experienced in international
trade to negotiate and develop the franchise agreement.
Control
Investment
Time
Risk
Flexibility
The company must be able to remain in the trading relationship for a set
period of time.
Original Equipment Manufacturer (OEM): A company in a foreign market produces goods to a required
design and specification provided by the subcontracting party.
Own Design and Manufacture (ODM): A company in a foreign market designs and manufactures a product
for a company.
There is no real cost to establish the manufacturing process in the target market.
The company does not have to obtain a business license to conduct operations.
The products can be produced in the target market, removing the need for transportation over long
distances and payment of import duties and taxes.
Products produced by subcontractors are sold under the contracting companys brand name
The company can benefit from the knowledge and experience of the local manufacturer.
There is the potential for a companys reputation being damaged if a subcontractor is found to be operating
in an unethical manner.
Element to
consider
Suitable conditions
Company goals
Size of
company
Resources
Product or
Service
Remittance
The company must be able to pay the subcontractor for produced goods
before receiving a sales income.
Competition
Intermediaries
Control
The company must have substantial control over production, marketing and
selling activities.
Investment
Time
Risk
The company must be able to deal with the risk of business losses from theft
of intellectual property and the risk of reputation damage.
Flexibility
Companies can benefit from the marketing knowledge and skills of local partners.
Companies can develop a local presence without having to invest in the market.
Requirements for local professional accreditation in order to conduct business activities are met by the
partner company.
The reputation of the local partner will have an impact on a companys reputation.
gain a foothold;
They want to establish or expand their presence in a target country relatively easily.
They can devote the managerial time required to employ personnel, find and manage offices, and maintain
operations.
They can deal with the legal aspects of being liable for civil action taken against the office.
In a joint venture, two or more companies form a strategic relationship with the aim of conducting business in a
foreign market.
The partnership forms a separate business entity from the parent companies and is formed for a specific business
purpose and for a limited duration.
Advantages and disadvantages
Joint ventures provide companies with higher sales volumes, greater market penetration, and greater profit potential
than any other entry strategy.
Because the amount invested is shared between two or more companies, it reduces the amount each partner must
contribute and also limits liability.
There are various disadvantages in setting up a joint venture. Each partner must relinquish some control over the
operation, and management decisions must be shared. If one partner wants or need to pull out of the partnership, it
can be very difficult to regain any of the funds invested in the venture.
When is a joint venture a suitable strategy?
Joint venture is a strategy that companies should consider if the following conditions apply:
Their objectives are to maximize profits, rapidly expand market share, or diversify their company activities.
Element to
consider
Suitable conditions
Company goals
Resources
The company must have senior management support for the investment.
The market and regulations must have been thoroughly researched.
Product or
Service
Any product or service is suitable. The product or service might be one that
the company is not currently associated with.
Remittance
Competition
Intermediaries
Control
Investment
Time
Risk
Flexibility
Licensing
Franchising
Branch Offices
Joint Ventures
Commissioning a competitor analysis company to investigate the market.
Using directories, such as Yahoos Business and Economy directory (dir.yahoo.com/business_and_economy) or
Hoovers online (www.hoovers.com).
b.
Using the skills or resources of another company to conduct activities in a foreign market
c.
It receives the right to sell the franchise to other companies in the market
b.
c.
d.
Answers: B, B
Licensing
Franchising
Subcontracting
Loosely coupled strategic alliances
Companies can also enter a market through a strategy that involves direct investment in the market. These strategies
include opening a branch office, forming a joint venture, or Greenfield investments.
Activity: Case Study
Now that youre familiar with the subject matter of this chapter, please read the following case study.
Analyze each market entry strategy and explain which two will be the most appropriate to select.
Identify three competing firms that might be a challenge to your company in the target market.
Identify competitive gaps in the market that your companys product or service might be able to fill.
Post your findings on the main discussion forum. Make sure you inform your colleagues of your chosen
company and its product or service in your response.
Review your colleagues responses and respond to any that you find interesting.
be courteous.
The exporting company receives specialized marketing assistance without incurring other costs or
relinquishing control over the transaction.
Sales can be negotiated with reputable foreign buyers without having to travel to the market and without
having to employ sales representatives there.
Because the agent is no longer involved once the sale is made, the exporter is in a position to establish
direct links to buyers and end-users.
Sales might dry up if the agent is incompetent or focused on the interests of other clients.
Any complaints, or requests for after-sales service, from the buyer will come back directly to the exporter
and not to the agent.
Finding an agent
To be effective, an agent must know the market, have extensive contacts, have objectives that are compatible with
those of the exporter, and know the product well.
There are several sources companies can use to identify agents in target markets:
Trade associations
Paying agents
In general, agents take a commission (usually expressed as a percentage) on what they sell. However, that
percentage varies according to circumstances.
Slide 2: Distributors
Distributors normally purchase an exporters product, maintain an inventory, and then resell to retailers or industrial
clients for a profit.
Distributors are also referred to as wholesalers.
When distributors have taken possession of the exported goods they take on functions that the exporting company
would otherwise have to perform. Distributors organize the promotion of the products they sell, determine the best
selling price for the market, and take care of after-sales services.
Selling to a distributor leads to some loss of control over how a product is marketed, sold, and delivered in the target
market.
Companies should work with distributors when the numbers of customers to be reached cannot be managed by an
agent and when significant distribution, technical service and support, infrastructure and customer service needs are
present.
Finding distributors
Companies can find distributors using similar methods to the ones they would use for finding an agent (obtaining
information from trade associations, foreign chambers of commerce in their country, their countrys chamber of
commerce in the target market, and local trade specialists).
Another good approach is to find companies that are already successful in the target market.
For the best chances of success, companies should be looking for a distributor with all or most of the following
attributes:
In-depth knowledge of barriers to market entry and strategies for overcoming them
Experience in selling the same types of products as those being exported by the company
A method of operating that is compatible with the business interests and attitudes of the exporting company
Activity: Discuss
There are many characteristics that a company should look for in a potential distributor. Which one do
you think is the most important? Why?
Post your ideas on the main discussion forum. Review your colleagues responses and reply to any that
you find interesting. Please remember to be courteous.
This activity should take you about twenty minutes to complete.
The required amount of control over marketing and pricing in the foreign market. Using a distributor might
remove most or all of a companys control over how its product is marketed and priced unless careful negotiations
are conducted.
The need for after-sales service. If a product requires after-sales service, companies will have to negotiate
the provision of these services with the distributor or use an agent and bear the responsibility for after-sales
service.
The financial situation. Companies will not have to pay distributors to sell their product and will receive all of
the proceeds from the sale. Agents are financed by the company and might need advances for expenses.
Storage and delivery of goods. Distributors take on the responsibility for storage and transportation of goods
when they have entered the foreign market. With an agent, a company will have to make arrangements for
storage and transportation to the customers.
Territory
Exclusivity
Commissions
Status
Training
Sales method
Payments
Trading Houses
Trading houses are firms that buy goods from manufacturers specifically to export them.
There are hundreds of trading houses worldwide and companies can work with them for numerous market entry
strategies, although they are most likely to be used for indirect exporting.
Other ways in which trading companies can act in a market entry strategy include:
b.
c.
A wholesaler
d.
b.
c.
d.
Wholesaler
b.
Agent
c.
Trading company
d.
Export house
Answers: A, C, A
Slide 6: Summary
Distributors act as customers of the exporting company, but have many benefits for an exporter.
Because distributors are experienced in marketing and selling in their local markets, exporting companies do not
have to worry about how to market their products or pay for expensive advertising campaigns.
Distributors will also organize shipping within the local market, further reducing the burden of expense and
administration.
However, companies that do not want to relinquish control over how their product is advertised, priced, and sold will
probably find that using a distributor is not a good strategy for their exporting activities.
Agents work for an exporting company and strive to make the best possible deals in target markets.
They are helpful when companies are unaware of how to find foreign customers, do not have the resources to
research and negotiate with foreign customers, or will have problems adapting to foreign business customs and
procedures.
Companies that use indirect exporting as a market entry strategy will often sell to exporting or trading houses.
Slide 7: Exercises
Exercises
Exercise 1
List five differences between agents and distributors in their roles as direct exporting intermediaries.
Exercise 2
For the following five companies, discuss whether using an agent or a distributor will be the best direct exporting
strategy.
A manufacturer of high-quality, water-resistant, designer watches designed for divers and surfers. The
watches were recently featured in an action movie and have consequently become a must-have accessory.
A company that develops and delivers training sessions for call centers. The company wants to break
into the Indian market.
A manufacturer of a new mop called The Shark, which has a patented technology for absorbing large
particles as it mops, eliminating the need for vacuuming or sweeping hard floors before mopping.
An electronics company that provides a two-year warranty for all its products.
However, there are many issues that companies should consider before setting up an e-commerce operation.
Product suitability
Not all products are suitable for e-tailing. The most successful e-tailing companies deal with digital products, music,
films, photography, financial and stock trading transactions, and software. Purchases that customers might find
embarrassing to make, such as pornography, also sell well on the Internet.
Products that tend to sell less well online are those that involve customer selection based on taste, colour, texture, or
feel.
Activity: Think About It
Do you ever purchase goods or services online? If so, what types of goods or services do you
purchase? Are there any purchases you would not make online? Why?
Customer acceptance issues
Customer acceptance of e-commerce has not been as widespread as was initially envisioned. Many customers still
avoid making purchases online.
Concerns about security and identity theft
Customers are increasingly aware of the possibility of having their credit card and other personal information
intercepted online. To deal with this concern, companies should construct their websites with Secure Socket Layer
(SSL) encryption and ensure customers are aware that their transactions are conducted on a secure site.
Companies can also offer alternative payment methods so that customers have another option that makes them feel
more comfortable with making a purchase online. The three most popular payment alternatives are Bill Me Later,
Google Checkout, and PayPal.
Access problems
Different areas of the world have varying rates of internet use. If companies are targeting a market with a low
percentage of Internet users, e-commerce will probably not be an effective market entry strategy.
Companies must also consider the demographics of their target audience. Many older customers still tend to find the
concept of the Internet intimidating and confusing.
Lack of social interaction
Many customers enjoy the social interactions they obtain when browsing and purchasing in physical stores. Shopping
online is impersonal.
Lack of instant gratification
People often make purchases to boost their mood. When they must wait days or weeks for a purchase made online,
this incentive disappears.
Shipping issues
Many online stores must ship products considerable distances and the price paid by the customer must include
shipping and handling charges.
Legal issues
An essential issue to consider is the problem of legal liability and which jurisdiction will take precedence in a dispute.
Companies should check carefully that their e-commerce operation does not violate any laws or regulations in their
target markets. In these cases, local law enforcement takes action against the operators of the website.
Tax issues
Companies should consult a lawyer about the tax regulations that will apply to their e-commerce operation.
Security issues
Companies that establish e-commerce operations face many security risks, including the following:
Denial of service attacks: These stop authorised users accessing a companys website and result in reduced
functioning of the website or its complete shutdown.
Unauthorised access to sensitive information: Hackers can obtain intellectual property and alter it, destroy it,
or steal it to sell on to a competitor.
Malicious alterations to websites: Hackers have been known to alter website content to negatively impact on
a companys reputation or to direct customers to competing websites when they click on a link.
Theft of customer information: Many cases have arisen where customer credit card details, addresses, and
other personal information have been stolen for criminal purposes.
Damage to computer networks: Virus and worm attacks can seriously affect company functioning.
To deal with these risks, companies can establish various levels of security, including using authentication systems,
such as usernames and passwords, installing intrusion detection software, and using firewalls.
Viruses, Trojan horses, and worms are malicious software programs designed to damage computers. Attacks by
these types of malicious software can have serious consequences, including:
Recording of keystrokes made by an authorised user, enabling theft of passwords and usernames
Companies must ensure that all computers have firewall and virus protection. Employees should not download
unauthorised programs or documents from the internet and not open unexpected attachments in e-mails. Companies
should also make multiple backups of essential data and store them on non-Internet connected computers, on discs,
or with reputable data storage companies.
Computer and website maintenance issues
Setting up and maintaining a website or other e-commerce operation requires that company personnel are technically
competent and experienced. Maintenance of computer systems, upgrades to websites, and dealing with computer
and internet problems are time consuming and expensive. If companies do not have staff that can be dedicated to
maintaining the computer network, they will need to outsource these jobs.
Activity: Report
Three potential ways in which companies can provide an alternative payment method are Google
checkout, Bill Me Later, and PayPal.
Choose one of these methods and research it online. Prepare a short report for your colleagues that
includes the following information:
Interesting features
Post your report to the online discussion forum. Review your colleagues responses and reply to any
that you find interesting. Please remember to be courteous.
This activity should take you about 90 minutes to complete.
Top level domain: This is the denominator at the end of the address and is often .com
Second level domain: This is the part of the website name preceding the top level domain (such as Google
in Google.com)
A companys first choice should be its registered business name or other trademarked name.
Companies must check whether their desired name or phrase has already been assigned by searching the Universal
Whois Search engine (www.uwhois.com).
A company must register a chosen domain name with a domain name registrar.
Organizing hosting
Some companies will have the skills and resources to develop website pages and store them on their own servers.
Companies that are not able to host their own website can use a hosting company.
Designing the site
Website design and development is the most crucial aspect of an e-commerce operation.
The content on the site should be laid out clearly and concisely so that users can easily find the information they are
searching for. Links to other pages should be clearly signposted.
If possible, the website should be constructed in the language spoken in the targeted market. For countries with more
than one official language, such as Canada, two versions of the website should be created.
Activity: Discuss
Think about one website you have visited that you thought had great design and was easy to use. What
features of the website did you like the best?
Post your thoughts on the main discussion forum and respond to the ideas posted by your colleagues.
This activity should take you about 45 minutes to complete.
Purchasing shopping cart software
To sell online, companies need to add shopping cart software to their websites. Shopping cart programs enable
companies to take orders, calculate shipping charges and sales tax based on global rules, and send e-mail
notifications to customers.
Setting up a merchant account
Companies that want customers to pay online using their credit cards will need to set up a merchant account with a
bank.
Setting up a payment gateway account
After obtaining a merchant account, a company must set up a payment gateway account. This account verifies the
credit card information provided by customers and authorizes payment transfers.
Action
Decide which products can be best sold online to the target market.
Divide the products that will be sold into categories, such as house
wares, garden products, and electronics.
Decide which products can be sold as package deals.
Determine any special shipping rules.
Decide if there will be handling charges for any or all
products.Determine special packaging requirements.
When all items are uploaded, organize them into the categories
established in step 1.
Define the rules that apply to all products for applying shipping,
handling charges, and tax.
Set up the payment methods the company has selected and the
online merchant account details.
Step 6: Create a Shopping Create a new web page to be the shopping cart page and add a cart
Cart Page
component.
Step 7: Create Catalogue
Pages
Make sure key words appear in the first paragraph of website content.
Find websites of similar companies and contact them to request reciprocal linking.
Slide 6: Summary
The Internet offers companies a way to expand into international markets or to supplement physical trading.
Many companies now offer some form of e-commerce, but new companies should consider the advantages and
disadvantages of selling online before moving into international e-commerce.
Even if companies do not sell their products online, they can still establish some form of e-commerce operation by
linking to business partners or customers using EDI or by using electronic payment methods. They can also use the
Internet or e-mail to strategically market and advertise their products and services to an international audience.
Slide 7: Exercises
Exercises
Exercise 1
Not all products or services can be sold successfully online. For each of the following companies, review the
advantages and disadvantages covered in this chapter, along with issues surrounding set-up of a website,
advertising and marketing issues, and then discuss whether they should consider an e-commerce strategy for
entering their chosen market.
A UK company offering immigration services to people around the world who wish to emigrate to the UK
A US company selling a wide range of affordable clothing to customers in Canada and Europe
Post your responses on the main discussion forum. Read and respond to your colleagues responses.
Exercise 2
If a company dealing in cut price holiday packages wanted to set up an e-commerce operation to sell
internationally, what would be the most serious risk or issue? What strategies could the company adopt to deal
with this issue?
Post your response on the main discussion forum.
Exercise 3
Select one product or service that could be offered by a company and develop a paragraph of website content
and search terms designed to increase results ranking for the companys website.
Conduct an Internet search using your selected search terms and describe the results in terms of competing
products and companies.
Post details of your chosen product or service and the website content you have developed on the main
discussion forum. Add information about the results of your Internet search.
The partnering companies share the advantages and the management of the alliance.
The partnering companies are mutually interdependent, meaning that the actions of one company have an
impact on the other.
The partnering companies are often competing ones.
There are various degrees of association between companies in a strategic alliance, from loosely coupled to tightly
coupled. They can also be divided into two main categories of strategic alliance: those that are based on transfer or
sharing of resources and those that are based on ownership of capital.
Types of strategic alliance
Based on transfer
Based on investment
(loosely coupled)
(tightly coupled)
Joint ventures
Mergers
Distribution arrangements
Enhancing competitiveness
Dividing risks
term if they retain partial ownership. Another reason for sharing technology with a partner company is that the
technology might be so new or sophisticated that it is difficult to package for sale or lease.
Forming economies of scale
Companies with complementary skills can rely on each others proven expertise instead of spending time and
resources to independently develop what has already been achieved.
Enhancing competitiveness
The most competitive corporations are adopting a strategy of maintaining their core competencies only. (Core
competencies are areas in which a company has genuine knowledge and ability.) Gaps in the skill bases are then
filled by partnering with a company that has the missing skills.
Dividing risks
Risk sharing through partnering is most often seen in research and development areas. Partnering can be used to
share risk in other areas as well. For example, companies can share transportation and distribution systems: this
saves money and enables faster delivery of the product. Joint marketing is another way of spreading risk and
increasing returns.
Setting new standards
Forming alliances is one approach to establish standards in an industry. It also increases the chances that the
standards a company invests in will be accepted throughout the industry.
Entering markets
Strategic alliances are effective ways of entering new markets. Partners can provide established marketing and
distribution systems, as well as knowledge of the markets they serve. Foreign partners can advise a company on how
to modify a product to meet local regulations and market preferences. They can help with such issues as translation
of documentation, conversion from metric to Imperial measures, conversion of power requirements, and compliance
with packaging regulations.
Overcoming competition
A well-conceived alliance can mean a head start in a market, possibly even preventing other competitors from
entering. Forming an alliance with an established, major company can reduce the influence of other companies.
Activity: Report
Companies decide to form strategic alliances for many reasons. Conduct an online search for a
business news article about a strategic alliance that has been formed recently.
What were the reasons for this strategic alliance? Might the companies involved have met their
objectives more effectively by using a different strategy?
Post your findings and your opinions about the alliance to the main discussion forum. Review your
colleagues responses and reply to any that you find interesting. Please remember to be courteous.
This activity should take you about 40 minutes to complete.
Avoidance strategy
Loss of freedom
Loss of control
Loss of profile
Loss of reputation
Leaks of proprietary
information
Disagreements
Extensive time to
establish and
manage the
partnership
Complexity
Dependence on
partner firm
Personal
incompatibility
Cultural differences
Research and development strategic alliances are formed for the purpose of developing new products and
technologies. Usually, the companies work together on the research side of the project and then develop the products
independently.
Suppliers can anticipate problems and develop effective strategies for solving them. This enables them to
provide a better service for regular customers.
Suppliers begin to see themselves as stakeholders.
Suppliers might be able to offer the trading company important advice on improving internal processes. They
might also provide access to their own network of contacts.
By directing business to a particular supplier, the purchasing company might receive discounts for volume,
thereby realizing savings and enhancing competitiveness.
A supplier might be more agreeable to easier terms of payment, thereby assuming part of a transactions
risk and improving the companys cash flow.
Buyer-seller alliances often use one or more of the following systems to meet their objectives:
Freight forwarders: Many companies use freight forwarders to expedite their shipments abroad.
Business advisors: Business advisors for international trade can include lawyers, accountants, financial
intermediaries, management consultants, or political lobbyists.
Activity: Find Out More
Vendor managed inventory has become widely used in supplier alliances. One useful website, which
details exactly how VMI functions and how a company can set up and run a VMI system is
www.vendormanagedinventory.com/
This site also details how companies can use EDI systems to enhance international trade.
Marketing alliances
Marketing alliances, often called co-marketing alliances, are partnerships between companies with complementary
products that are aimed at the same market. The partners collaborate in marketing, and sometimes even production
of products. This collaboration aims to ensure that one companys products can work with, or complement, the other
partners products.
A main challenge with marketing alliances is the inherent level of competition between the partners. They are often
producing competing products in the marketplace. Companies must also share proceeds, and there might be
disagreement between the partners about positioning or pricing.
A very important consideration for a company thinking about a co-marketing alliance is legal responsibility. Customers
in a foreign market purchase a product from the company marketing it. In the event of a claim for damages, both the
seller and the producer of the product could be sued.
In a licensing agreement, a company sells the rights to a developed product or service in exchange for a specified
fee. The buyer of the technology (the licensee) invests capital to use that product or service in the hopes of selling it
in the local market.
As part of the licensing agreement, the licensee usually agrees to a sell the product or service in a defined area, to
pay royalties and fees, and to meet sales targets, quality standards, advertising and marketing guidelines and noncompete provisions. The licensee can negotiate for sub-licensing arrangements so that it can sell licensing rights on
to other companies in the local market.
In return, the licensor will generally agree to grant the licensee exclusivity for the selling area and provide the licensee
with technology upgrades. The licensing agreement will determine the term and length of the arrangement and
conditions for monitoring and settling disputes.
Issues to consider
The company purchasing the license will take on the expense and risk of production, marketing and distribution in the
target market. However, because licensing does not involve a great deal of cooperation between the licensing
company and the foreign licensee, companies will often not work together to achieve common objectives. A common
problem with licensing is that it results in a competitor in the target market.
To try and avoid licensing problems, companies must ensure that experienced international trade lawyers draw up
licensing agreements carefully. They must cover the following issues:
Exclusivity
Quantity
Territory
Sublicenses
Exporting
Confidential information
Trademarks
Quality control
Monetary payments
Franchising
Franchising is a specific form of licensing that involves selling the rights to a complete package of trademarks,
processes, technologies, designs and copyrights in order to operate a specific business.
The holder of the franchise (the franchisor) brings process technology, a business name or reputation, equipment and
support to the business venture.
The buyer of the franchise (franchisee) contributes capital and the effort of setting up and running a business in a
new market. The franchisee is given the right to use a certain process or service-delivery mechanism, and is also
given access to proven systems, marketing and advertising support, and full use of the trademark.
Companies must be aware of the possible disadvantages associated with franchising:
Companies must spend substantial sum on training franchisees in the ways of their business
Companies must also be confident that what works in their local environment will work overseas
A failure can create a negative impression of the franchise brand and prevent further expansion.
Franchising
Companies that want to sell franchises should meet the following criteria:
The company is successful in the domestic market and has a tested product or service to export abroad.
The company has selected target markets carefully and carried out research to ensure that the franchise will
be suitable and desirable.
The company is willing and able to support the business partners who purchase the franchise.
Issues to consider
Companies must seek legal advice and consider the following issues:
A licensee will not operate under the licensing companys name, whereas a franchisee will
b.
A licensing company will provide ongoing training and management support, whereas a franchising
company will not
c.
A licensee will only produce one type of good or deal with one service, whereas a franchisee will
produce or deal with many
b.
c.
d.
Answers: A, D
Slide 6: Summary
Strategic alliances are an essential component of international trade. Companies should examine all possible ways in
which they can form partnerships to reduce their risks and costs and leverage the experience of other companies.
Licensing is a relatively straightforward market entry method for companies that want to get their products or
expertise into a foreign market with a minimum level of investment and risk. The company purchasing the license will
take on the expense and risk of production, marketing and distribution in the target market. A common problem with
licensing is that it results in a competitor in the target market.
A franchise enables companies in the target market to use proven processes, trademarked products, or services for a
specified period of time. Franchising is a growing method of international market entry, but companies must be aware
of the possible disadvantages associated with it.
Activity: Case Study
Now that youre familiar with the subject matter of this chapter, please read the following case study.
Slide 7: Exercises
Exercises
Exercise 1
List five reasons why a small company should consider forming a strategic alliance to enter a new market.
Exercise 2
Strategic alliances aim to provide a win-win situation to all partners. In a case study in this chapter, Omni Lingual
formed a partnership with Language Line, a competing company with a larger service offering. The benefits for
Omni Lingual were clear. How would you persuade Language Line managers that this was a beneficial move for
their company as well?
Exercise 3
What are the dangers in forming an alliance to overcome competition?
Exercise 4
A company has a patented bottling process for soft drinks. It wants to license the process to bottling plants in
India. What considerations must be covered in the licensing contract?
Exercise 5
A popular Japanese sushi restaurant sells franchises to UK individuals that set up a chain of franchised
restaurants. Growth is rapid and the chain becomes very successful. However, an outbreak of food poisoning is
tracked to one of the chains outlets and maggots are found infesting the food in the kitchens. Although each
franchise is owned by a separate business, the outbreak has a negative impact on all the restaurants because the
name becomes associated with maggot infestation.
Post your responses to all these activities on the main discussion forum. Review your colleagues responses and
reply to any that you find interesting. Please remember to be courteous.
These activities should take you about one hour to complete.
Most foreign direct investment is still made by large companies investing in the construction of facilities abroad.
Reasons for foreign direct investment
Some governments prohibit or limit imports of goods produced in other countries. A company can build a
production site in the foreign market and produce locally.
roducing goods in the target market avoids import duties and other taxes and the requirements for import
permits.
Companies can obtain the services of skilled employees in the target market or gain intelligence held by
people in that market.
Who should the company get to know? What contacts are most valuable?
How important are other considerations such as a well-educated work force capable of innovation?
Are pivotal customers and key competitors already present in this market?
Will the company be first in the market and therefore gain an advantage with the consumer?
Will entering a market cause competitors to react, and possibly derail the firms strategy?
Will the firm be able to capture market share at the expense of competitors and will this have an impact
beyond the target market?
Will such action reduce competitors profits by increasing the level of competition?
Can the firm tie up preferred distribution in the country by making an investment now?
Joint
venture
Merger or
acquisition
Management
control
High
Medium
High/medium
Financial control
High
Medium
High/medium
Political security
High
Medium/low Low
Adaptability/
flexibility
High
Medium
High
Knowledge of
market
High
Medium
Medium/high
Start-up
High
Medium
Medium/high
Capital
commitment
High
Medium
Medium/high
Possible costs of
disputes
Low
Medium/high Medium
Potential liability
Low
Medium/low High
Long-term
commitment
High
Medium/low Medium/high
Benefits
Costs
The company can adjust and adapt its strategy or operations to meet the needs of the parent companys
strategy.
Acquisitions usually require cash. Accounting practices vary, the necessary information may be hard to obtain, and
valuations often require extensive investigation.
Time
Mergers and acquisitions rely on companies finding the right company to acquire or merge with and are therefore
slow to set up.
Legal restrictions
Companies should ensure that they are aware of any possible legal restrictions on the acquisition of certain types of
companies in the target market.
Cultural considerations
Cultural deterrents can also make an acquisition very difficult.
Company background
Before moving to merge or acquire with a company, its background, history, financial situation, reputation, and
competitiveness must be researched thoroughly.
Environmental risks
A company should ensure there are no unknown or unquantifiable environmental risks and liabilities.
Fact checking
Companies should never take numbers or descriptions at face value.
Developing a relationship
It is important to develop joint objectives, strategies and financial plans that both parties share.
Pricing
The rationale for pricing must be understood. In privatization sales it might not be the same as in sales to private
buyers.
Taxation
Proper tax planning can maximize the value of an acquisition for all parties involved.
Disadvantages
Unincorporated
Existence of the
The actions of one partner or
company is not
individual can lead to the
affected by the
dissolution of the joint venture.
actions of individuals.
Difficult to end the
joint venture.
Level of privacy: Because an unincorporated joint venture is a private agreement and not the formation of an
independent legal entity, it is protected from public scrutiny.
Accounting: With an unincorporated joint venture, partners can retain separate accounts. Losses from the venture
can therefore be accurately assessed and offset against income for tax purposes.
Legislation: Unincorporated joint ventures allow flexibility in company legislation.
Financing: Obtaining bank loans will be easier with an incorporated joint venture.
As with other forms of strategic alliance, the creation of a joint venture can have broad implications for competition
policy. Two companies deemed to be competitors might be accused of collusion in the marketplace if they form a joint
venture, unless the venture is specifically intended to operate in a manner that is distinct from that of the parent
companies.
Joint venture considerations
Companies must consider all aspects of the decision to form a joint venture carefully. It must never be seen as an
easy way to enter a market. It should only be considered as a possible strategy if a company can find the right
partner with complementary skills, resources, needs, and expectations. The foreign partner must know how business
is conducted in the local market, have a track record of success, and be able to commit resources to the venture. The
proposed joint venture should also have enough potential to sustain levels of investment.
Companies should also ensure that they have considered the following issues:
Control
Valuation
Autonomy
Continuity
Exit strategy
Record keeping
Accounting practices
Legal counsel
Environmental guidelines
Joint ventures tap into the foreign partners knowledge of the local business environment.
They avoid buying the problems and liabilities of the local partner (which could happen through acquisition)
by buying only expertise and access.
They permit the partners to approach several markets simultaneously, which the partners could not afford to,
or manage to, do individually.
They foster complementary skills, resources and capacity, leading to greater synergy.
The choice of personnel assigned to the joint venture may be influenced by how important the partner feels
the joint venture is.
The local partner often hires local staff, and their allegiance may subsequently gravitate to the local partner.
Control issues may take precedence over getting the job done, and may lead to failure in a market that
would otherwise be very attractive.
The reputation of the firm is tied to the partners reputation.
A joint venture carries more legal and financial obligations than do other types of cooperative ventures or
alliances.
The costs of exiting (particularly opportunity costs) can be high, unless thoughtful exit provisions have been
included in the original agreement.
Slide 6: Summary
Foreign direct investment involves any method in which a company acquires a controlling interest in a company in
another market. There are several forms of foreign direct investment:
Slide 7: Exercises
Exercises
Exercise 1
There are two main forms of joint venture operation: incorporated and unincorporated. A company wishes to form
a joint venture operation, but wants to limit its liability and ensure that its chosen partner company cannot end the
joint venture without its agreement. Which form of joint venture should it consider? Explain your reasoning.
Exercise 2
Greenfield investment is a highly risky market entry strategy. When should companies consider it?
Exercise 3
In a case study in this chapter, H.B. Fuller invested in building new facilities in China. Was this the best strategy to
meet their strategic objectives? What other strategies might have been suitable?
Exercise 4
What is the main difference between an unincorporated joint venture and a business partnership?
Post your responses on the main discussion forum. Read your colleagues responses and reply to any that you
find interesting. Please remember to be courteous.
These activities should take you about 40 minutes to complete.
Identification of Gaps
When the company has examined its strengths in the context of its corporate objectives, it should be able to
determine what it needs from a partnership.
Service offering
A company should assess the products and services it offers to its customers, from the foreign customers point of
view.
Human resources
The company should examine the capabilities of employees in the areas of language, knowledge of the target
country, and personal contacts there.
Familiarity with the market
The company should evaluate its understanding of the target market to determine whether it is sufficient to launch a
successful marketing program.
Process and technology
The company should assess its production processes, technology and methods of operation.
Financing
The company should estimate the financial resources needed to enter the new market to determine whether it can
undertake the venture with internal resources.
Management resources
Financial resources
Competitive advantages
Markets served
The prospective partners market experience can be considered in terms of the products handled, the clients served,
and the regional dimensions of the market.
The products or services offered by the potential partner should be itemized and classified.
The customer base that the company serves is another important factor.
Finally, a company must determine the geographic characteristics of the markets serviced by the potential partner,
and the types of distribution employed.
Strategic objectives
Strategic objectives determine what the potential partner will want to get out of the partnership. These might include
product diversification, technological advancement, and industry or geographical focus.
Corporate culture
A companys culture can be evaluated according to a number of criteria:
Is authority delegated?
Characteristics
Size, organizational structure, management style, operating policies, and philosophy are very important
characteristics.
Ideally, the partnering companies should be of a similar size. If they are not, special provisions may be necessary to
prevent the larger partner from dominating the relationship.
The marketing capabilities, experience and strategies of the potential partner should be appropriate to the product.
They should be similar to the companys marketing capabilities, except that they should relate to the target market.
Ideally, corporate cultures should be closely matched. The fundamental values that underlie each companys
business approach must be reasonably similar if the partnership is to succeed.
Attitudes
Each company should be able to cooperate easily and effectively with the other.
It is also important to understand what a potential partner wants from the relationship. Are the goals of both
companies compatible?
It is also important to determine how critical the proposed venture is to the partners long-term business strategy and
the level of the potential partners commitment and trustworthiness.
Operations
Operating an international business involves tackling many logistical problems. Marketing, order fulfillment, and aftersales services and collection must be coordinated.
Some market entry strategies, such as joint ventures and mergers, require closer collaboration between partners than
others, such as direct exporting. For these intensive business relationships, companies should also assess the
following:
Do the partners have similar attitudes to marketing and distribution strategies or customer service?
Do partners have similar employee policies, compensation programs, hiring strategies, and attitudes to
labour relations?
In most countries, companies can approach the government department responsible for trade for information and
resources. Trade departments will offer advice on exporting and other market entry strategies and will have
databases of trade, investment, and technology counsellors abroad.
Foreign embassies and trade commissioners in foreign markets
Many countries have trade counsellors attached to their embassies, or can otherwise provide business
information and contacts in their home countries.
Business associations
Business associations (chambers of commerce, boards of trade, industry associations, and bilateral business
councils) can provide contacts and business information.
Business advisors
Companies should consider using consultants and specialists, such as lawyers and accountants, to search for
potential partners.
Financial institutions
Banks, individual traders (brokers), and trading companies are all useful sources of information about potential
partners in a target market.
Commercial databases
There are a variety of commercial databases that provide business information, including contact information. There
are also services that are more specifically geared to partnering.
The International Chamber of Commerce (www.worldchambers.com) provides many services for international
companies. One of the most helpful is the official Chamber directory. This has 14,000 entries representing 40 million
companies and is a network for establishing new business contacts and obtaining helpful market information. The
directory can be browsed for validated business partners, public tenders, and trade fairs.
Expos and trade shows
Companies can also use trade shows or trade fairs to connect with potential partners as well as determine the market
potential for their goods and services.
Participating in international trade
shows
Companies can participate in trade shows in a variety of ways:
1.
They can attend a show as visitors. They can use such attendance to see who their competitors are, gauge
the market and develop a list of contacts for later follow-up.
2.
They can participate in shows as exhibitors. Though more expensive, exhibiting at a show can pay off in
terms of raising awareness, developing contacts and enhancing prestige. In order to cut down on the costs of
exhibiting, smaller companies can join with other companies to present an integrated exhibit.
3.
They can participate in panel discussions or make a presentation. Many trade fairs also feature speakers
and workshops as part of their activities.
international trade. One useful feature of the site is a searchable list of trade events.
The trade events list can be accessed here:
www.export.gov/eac/trade_events.asp
Conduct a search to identify trade events associated with an industry you are interested in that is taking
place in a country of your choice.
Prepare a report detailing your results and discussing how useful you found this search facility.
Post your report on the main discussion forum. Review your colleagues responses and reply to any
that you find interesting. Please remember to be courteous.
This activity should take you about one hour to complete.
Track record
Financial history
Competitors
Legal problems
Slide 6: Summary
Selection of a foreign partner should receive as much, if not more, focus and scrutiny than selecting potential
employees.
A company pursuing partners must be patient and thoroughly investigate all possibilities by conducting a strategic
analysis, skills audits, capability assessments, and gap identification.
A company should start by assessing its own capabilities. This will identify the skills and resources the company
already has and provide an indication of the qualities a partner should have to fill gaps.
If gaps that can be filled by a partnership are identified, a company can define the characteristics of potential
partners. Partners must complement a companys capabilities and must be able to interact effectively with the
company.
To find partners, companies can use a range of sources, including business associates, government trade
departments, foreign embassies and trade commissioners, business associations and advisers, financial institutions,
and attendance at trade shows.
Slide 7: Exercises
Exercises
Exercise 1
Why is it essential to identify a potential partners strategic objectives?
Exercise 2
List the main characteristics a company must investigate about a potential partner for due diligence.
Exercise 3
Mrs. Bundt is a fictional chocolate company based in Canada that wants to find a partner in Australia for a joint
venture operation. The joint venture would produce Mrs. Bundt brand chocolate in Australia. What qualities should
the company be looking for in a partner?
Use the sources provided in this chapter to investigate business contacts in the target market. Identify a trade
advisor or service that will be able to help Mrs. Bundt identify a potential partner.
Post your responses to these activities on the main discussion forum. Review your colleagues responses and
reply to any that you find interesting. Please remember to be courteous.
These activities should take you about three hours to complete.
Chapter 9: Negotiating a
Partnership Agreement - Study
Materials
Slide 1: The Negotiating Process
Negotiations for a partnership proceed in stages, usually starting with informal discussions between senior executives
from both sides.
The main goal for the early stages is to establish trust and identify common objectives.
If the informal discussions are successful and a relationship starts to form, the next step is to appoint a more formal
negotiating team.
Step 1: Define objectives for the partnership
Before entering formal negotiations, a firm must be clear about its objectives for the partnership and must have an
idea of the proposed partners objectives.
Step 2: Assemble a negotiating team
The negotiating team should be drawn from a range of management levels and specialties. It must have the following
characteristics:
Members must understand the business and social customs of the country in which they are negotiating.
Team members must appreciate all the issues affecting the partnership, from broad strategic concerns to
legal and technical details.
Team members should have studied all companies in the partnership in-depth.
The team should include an experienced interpreter if the partner companies speak different languages.
The team must include senior management personnel and personnel with knowledge of technical,
operational, and legal details.
Production
Finances
Marketing
Sales
Distribution
After-sales service
When both teams have come to a shared understanding of the business framework, they express their agreement in
a memorandum of understanding (MOU). After the MOU has been developed, the teams begin exchanging contract
language, setting the stage for construction of the legal framework.
A statement of each partners roles and responsibilities must be set out in the agreement. This helps avoid
misunderstandings regarding practical applications of the agreement.
Organization and structure
The partnership agreement sets out the type of business organization to be employed. This can range from a
freestanding joint venture to a co-marketing arrangement. It also defines the scope of the venture, as well as options
for expansion.
Financing
The financial details of a partnership depend on the nature of the agreement. However, they all must include the
following key provisions:
The capital investment required from each party, if any, and the timing of the contributions
The value of the knowledge, technology or other intellectual property contributed to the partnership
The methods for calculating payments to partners, and the risks they will assume
This includes provisions for royalties, fees for service, recovery of expenses, division of profits, and any
other payments contemplated by the partners
Banking arrangements, including the conditions under which the partnership may borrow, and from what
sources
Accounting and legal services, including appointment of an auditor, and timing and approval of financial
statements
The insurance carried by the partnership, including insurance for business and non-business risks
The legal jurisdiction, and provisions for arbitration and dispute resolution
Dominant partner. One partner dominates the decision-making process. This is relatively easy to
manage.
2.
Shared management. Each partner has an active role in operational or strategic decisions. Such
ventures are more likely to experience conflict, but there is more opportunity for both sides to express themselves
and reach effective compromises.
3.
Split control. Each partner controls specific areas. Ideally, partners are assigned areas of
responsibility close to their strategic objectives. Because neither partner enjoys decisive control, coordination and
maintenance of objectives is extremely important.
4.
Independent. The joint ventures general manager takes responsibility for decisions. The
autonomy of the joint venture is recognized and respected by all partners.
Employees
Employment policy is a key part of a partnership agreement. It should specify methods for selecting employees, and
standards for evaluating performance. Compensation policy, as well as procedures for terminating employees, should
also be defined.
Marketing
Specific obligations for joint marketing should be set out in detail, along with any product supply agreements.
There should be some formal market development program, subject to revision and refinement as the partnership
proceeds.
Restrictions on activities of members
Partnership agreements often include restrictions on the activities of the members of the alliance.
Another common provision is an area of interest clause. This requires that any property, interest, or other business
opportunity acquired by any party to the joint venture be offered to the joint venture on the same terms and conditions
as it was acquired.
Default by members
The partnership agreement specifies actions or omissions on the part of members that would be in default of the
agreement, and the consequences of such default. There should be different penalties for different defaults.
Proprietary rights
If the partnership involves contribution of proprietary rights such as patents, trademarks or technology, the agreement
sets out the terms under which this property can be used. It should also set out specific licensing arrangements,
where applicable.
Term and termination
The commencement, duration and termination of the partnership agreement must be clearly defined.
The consequences of events such as bankruptcy or the death of key personnel should be specified. Some
agreements contain a hardship reopener that enables firms to modify or terminate the partnership in the event of a
members financial hardship or the ventures financial failure.
Other considerations
A number of other provisions are commonly included in partnership agreements:
1.
A governing law provision: This establishes which countrys laws govern operation of the
partnership
2.
A force majeure provision: This states that major external events beyond the control of the parties
may limit their obligations
3.
4.
Documentation
Negotiations and formal partnership documents are based on the initial MOU. Documentation is then expanded to
include specific arrangements for establishing and operating the partnership. The final partnership agreement must
cover all aspects of the partnership in detail.
The partnership agreement can be supplemented by the following additional documentation, when it applies to the
partnership:
5.
6.
7.
Leases
8.
Construction contracts
9.
Management contracts
10.
2.
Hire a lawyer
3.
4.
Prepare an MOU
Question 2: What is a business framework?
1.
2.
3.
4.
Answers: C, D
Slide 3: Summary
When a company has identified a suitable partner to work with, it must negotiate a partnership agreement that details
the responsibilities of each party.
It is important to establish trust early in the negotiating process, but companies must be aware of danger signals,
such as difficulty in coming to agreements or a potential partner acting in a way that seems dishonest.
Negotiations aim to establish a business and a legal framework, from which a partnership agreement can be drawn.
The agreement should contain details about the following:
Partner roles
Financial arrangements
Employee policies
Marketing policies
Proprietary rights
Treatment of disputes
A partnership can never be guaranteed to be successful, but careful planning and negotiation will make a successful
outcome more likely.
Slide 4: Exercises
Exercises
Exercise 1
Describe the elements of a business framework and a legal framework in partnership negotiations.
Exercise 2
In negotiations, what warning signs should a company be looking for?
Exercise 3
List three (3) important reasons for introducing a MOU.
Exercise 4
What are the four ways in which control can be assigned to a partnership?
Exercise 5
In pairs, choose two fictional companies that might partner and identify their product or service. Then, choose two
countries, one for each market.
Select one of the companies and imagine that you are the company owner. Your partner should become the
imaginary owner of the second company.
Imagine that the two companies are in negotiations to form a joint venture. Perform the following tasks:
1. Answer the following questions:
What would be the most important negotiating elements for your company?
How could you ensure that the partner company would benefit from the negotiations?
Objectives: What will communication achieve? Objectives might include team building, discussion of
progress, or collaboration on a project.
Messages: What information will be communicated?
Audience: Who will be communicated with? Will partners communicate solely through senior management
or will all employees receive some or all partnership communications? Will the communications plan be solely
internal to the partnership, or will information be passed to external parties, such as stakeholders, as well?
Schedule: When will communications take place? For example, a communications plan might schedule a
regular progress update meeting once a month, with a partnership review annually.
Method: What methods will be used for communication? These can include Electronic Data Interchange
(EDI) for real-time inventory and shipping communications, email or regular mail for business communications,
telephone or web conferences for meetings, and a website to post information for employees. Different methods
should be used for different audiences. Companies should assess which methods will be most cost effective and
timely for each message that must be communicated.
Other plans
As well as a communications plan, companies should agree on three other plans with their partners. These are a
documentation plan, a shared information plan, and a reporting plan.
Documentation plans detail what documentation partners must prepare, formats that must be used, when and how it
must be shared with partner companies, and the length of time that documents must be stored.
A shared information plan details what information must be shared between partners, and which information can be
kept private.
A reporting plan documents how and when partners should report to each other.
Conferences
The most cost-effective and efficient ways of conducting meetings internationally are telephone conference calls.
When all partners have access to reliable, high-speed Internet; web conference services provide an ideal meeting
forum.
They must understand the product and service they are working with.
They must be able to use any special equipment or technology used in production of goods or provision of
services.
They must be able to prepare required documentation to standards required by the partnership agreement.
A company will be very unlikely to find a partner that fulfils all these criteria. Companies must therefore plan a partner
development strategy to ensure that partner employees have all the knowledge and skills required to help the
enterprise succeed. A partner development strategy should outline the following stages:
Orientation
Training
Mentoring
Performance Appraisal
Orientation
The orientation process ensures that partners understand the mission, purpose and vision of the partnership. It also
helps partner employees understand their role in the partnership and the tools they will use to carry out their
responsibilities.
A process should be set up to provide new employees with the following:
A clear description of their own responsibilities, how their performance will be evaluated, and what rewards
might be expected
Training
Training, if it is relevant to the tasks people perform on the job, can improve individual and group performance.
Whether training is delivered in person or over the internet will depend on the following factors:
Mentoring
For the greatest chance of success, companies should organize a mentoring system to supplement training.
Experienced mentors from the company should be assigned to groups of partner employees and be available to
support them and answer questions as needed.
Performance appraisal
Formal staff assessment is an effective way to improve performance. It can be used to determine compensation and
to encourage continuous professional development.
The goals set for employees should be both short- and long-term, and should be reassessed as the partnership is
adapted to respond to changes in the business environment.
A major problem with bringing third parties into conflict resolution is that it can alert competing companies and
stakeholders to the problems that are being experienced. Competitors might use partnership dissent to expand their
share of the market.
Using the courts to settle disputes with international partners is likely to be ineffective, because of the great
differences between legal systems in different countries. It also undermines confidence in the partnership. It is
therefore better to look for other means of averting or resolving conflict.
Slide 5: Summary
Partnerships will only be profitable if companies are willing and able to devote a substantial amount of time and
energy to them.
Companies should develop proactive strategies for managing partners and communicating with them.
Companies should also ensure that monitoring is performed regularly. Partner communications should always be
planned in advance to ensure that the messages that need to be communicated are being shared with partners and
that the most effective means of communication are being employed.
Whenever possible, disputes should be resolved internally by reference to the partnership agreement or by engaging
senior management to conduct negotiations. If internal resolution is not possible, mediators can be brought in to help
resolve the dispute.
Slide 6: Exercises
Exercises
Exercise 1
TPlus is a fictional company manufacturing training shoes. TPlus wants to reduce costs involved in production
and thus increase its profitability.
Based on these business objectives, what would be the likely measurement criteria for a partnership between the
company and a supplier of the training shoe components (laces, synthetic soles, and leather uppers) located in
India?
Prepare a basic communications strategy between the TPlus and its fictitious supplier partner.
Exercise 2
This chapters case study described how Starbucks had disputes with many of its partner suppliers. How might
this situation have been averted? Could dispute resolution have resulted in a more successful outcome for all
parties involved?
Post your responses to these activities on the main discussion forum. Review your colleagues responses and
reply to any that you find interesting. Please remember to be courteous.
These activities should take you about one hour to complete.
The partnership is no longer able to help one of the partners meet its strategic objectives for a market.
One partner needs to break up the partnership earlier than agreed because of financial issues.
Exit Strategies
There are a variety of exit strategies that a company can consider when deciding how it might leave a market or a
business partnership.
Exit Strategies
Strategy
Details
Acquisition
Sale
Buy Out
A partnership agreement should also detail a dispute resolution process that the parties agree is fair and will accept
as binding.
Many contracts provide for dispute resolution by allowing appeals to be directed to a specified neutral institution, such
as the International Chamber of Commerce.
The partnership agreement should also specify the legal system under which the contract will operate. The
contracting parties can choose to be bound by either the laws of one of their respective countries, the laws of a third
country, or the judgments of the International Court at The Hague.
There are four key characteristics of the dispute resolution process:
Two very common dispute resolution mechanisms in commercial agreements are arbitration and mediation.
Arbitration
In arbitration, a dispute is submitted to an independent third party (the arbitrator) for decision and final resolution.
Mediation
Mediation is a non-binding process where an impartial and independent third party, with no decision-making power
(the mediator), attempts to facilitate a mutually acceptable settlement between disputing parties.
Activity: Find Out More
The ICC Commission on Arbitration has members from more than 90 countries. It has developed a set
of dispute resolution rules for international trade.
www.iccwbo.org/court/arbitration/id4199/index.html
The rules can be downloaded in several languages.
Read through the rules. If you like, post your thoughts on the main discussion forum. Review your
colleagues responses and reply to any that you find interesting. Please remember to be courteous.
This activity should take you about two hours to complete.
Time Taken to End the Partnership
If a partnership cannot be saved, it should be terminated in the fastest and most amicable manner possible. This will
benefit both parties.
A partnership agreements exit clauses should detail the notice that a partner that wants to terminate the relationship
must give to the other party to avoid business losses as much as possible and enable the partner to find another
alliance.
Compensation
It is important to include a penalty clause to cover a situation in which a partnership is terminated unilaterally without
due cause or reasonable grounds. That penalty should cover the costs incurred by the abandoned partner as a result
of the action.
A non-competition clause. This obliges the side leaving the partnership not to compete in the same business
for a period of time.
Non-disclosure clauses governing technology. These can extend beyond the life of a partnership and specify
that any technological secrets learned during the relationship cannot be disclosed, even after it ends.
Mutual property clauses. These can state that technologies or patents developed jointly during the
partnership will become mutual property, with both ex-partners having a say (or a veto) over how the technology
can be used or to whom it can be offered.
Clauses determining ownership of client lists. Client lists can be shared jointly, they can be split up between
the sides, or one partner can acquire the list with the other prohibited from approaching anyone on it.
Good will clauses. The good will contributed or shared by the parties must be protected, and a clause might
stipulate that the parties will not discuss the partnership and will protect each others reputations after the
relationship is terminated.
Slide 6: Summary
Successful exits of foreign markets and partnerships can be as important as a successful entry.
Companies should plan exit strategies in advance and ensure that their partnership agreements detail possible
reasons partnerships might end, and the terms and conditions associated with ending an alliance.
It is important to clarify how disputes will be handled through mediation or arbitration and document dispute resolution
procedures in the partnership contract.
An exit strategy allows for a company to leave the partnership gracefully and enables resources to be geared towards
new more successful and profitable ventures.
Slide 7: Exercises
Exercises
Exercise 1
List the reasons why a company might want to end a partnership.
Exercise 2
What exit clauses should a company include in a partnership agreement for your target market?
If you are working for a company interested in international trade, consider your companys unique product or
service and how this might affect partnership disputes. If not, select a well-known company and consider how its
product or service might affect partnership disputes.
Exercise 3
How can a company protect its operations from former partners?
Post your responses to all activities on the main discussion forum. Review your colleagues responses and reply
to any that you find interesting. Please remember to be courteous.
These activities should take you about one hour to complete.