6.

1 Explain how the flow of transactions and the flow of the physical product relate to the foreign
market entry mode.

Transaction flow is the path of ownership transfers between the producer and the final buyer. Physical
flow is the path of physical possession of the product between the producer and the final buyer. Together
they form the export marketing channel of distribution or foreign market entry mode.

Transactions may be facilitated by nonmembers who do not take title themselves (brokers), but arrange
or assist in the transaction flow.
6.2 Why is the decision regarding foreign market entry mode a particularly important decision for
international marketing managers to make.

The decision regarding foreign market entry mode is important for several reasons as given below.

a It can affect the final price that consumers will pay for the product. This is not only because each
participant requires a profit margin that is added to the price but also because efficiencies can be
created or destroyed.

b A proper channel can help reduce fluctuations in production demand. This can reduce problems
related to inventory cost and control and unstable employment.

c A channel can be slow and expensive to set up. This may hinder the profitability of foreign market
entry by reducing margins or missing opportunity windows.

d The entry mode decision may affect the other factors in the marketing mix. These include the final
price, the attributes, and the promotion of the product.

e Poor relations between producers and channel members can cause problems that may reduce the
effectiveness of the system.

6.3 Discuss the nature of the whole channel concept.

The whole channel concept views the entire channel of distribution as one integrated system with the
producer on one end and the final consumer or industrial user on the other. The significance of this is that
the system is only as strong as its weakest link. Therefore, great care should be given to the selection of
all channel members. The channel members and the producer can have a great effect on each other's
operations and profitability in the future.

Students can be expected to discuss the roles of the headquarters organization, the channels between
nations and the channels within nations the three components of the integrated system.

6.4 Evaluate the use of the Internet for export and other international marketing entry modes.

The Internet has become an important means of informing potential customers and potential marketing
channel participants about a companys products/services and its competitive strength. It is open to all
types of companies manufacturers, retailers, and service companies. It is also being used increasingly
for direct sales to businesses and consumers. Its use in B2C (business to consumer) marketing activities
is growing, but is much smaller in size than B2B (business to business) activities in sales, procurement,
and overall supply chain management. It facilitates both intra- and intercompany information exchange
and control of operations.

Notes to instructors:

a Through the use of the Internet a small company that designs customized automated production
systems for special applications was able to publicize its service and receive invitations to bid on
projects from foreign companies it had no other effective way of contacting.

b Chapter 7 provides additional information about the Internet and international marketing entry modes.
6.5 Government regulations can affect the viability and effectiveness of a company using the
Internet as a foreign market entry mode. Contrast the government regulations governing e-
commerce in the United States, a European Union country (e.g., the United Kingdom or
Germany), and an Australasian country. Is the Internet easier to use regulation-wise in one
of the countries? Explain.

Governmental regulations can impede the use of the Internet as a foreign entry mode by regulations and
restrictions, taxes, costs of service, and by any uncertainty regarding regulations or taxes.

In the US, the major regulations affecting activities on the Internet are primarily those related to all types
of commerce and competition. Connection costs are low. Sales taxes on Internet purchases are
prohibited by federal (national) law (as of September 2001), but this prohibition may elapse. Then state
and local governments would be free to pass a patchwork of state and local taxes on Internet purchases.

In Germany, privacy laws are very strong/restrictive, there are greater restrictions on advertising and more
strict limitations on what can be sold (e.g., Nazi-related items prohibited). There are many and sometimes
conflicting regulations of the other governments in Europe.

China has many rules restricting what companies can do and say on the Internet, and exercises
censorship. Internet access charges are comparatively higher than in the US

The use of the Internet is less restricted in the US than in Germany and China.

(Note to instructors: additional information on restrictions on the Internet can be found in Chapter 7.)

6.6 A number of alternative entry modes were identified in the chapter. Locate a company that
uses export and one using overseas production or a strategic alliance. Describe their market
entry strategies and determine why the companies differ in the entry mode being used.

Answers to this question will vary, but should include an analysis or evaluation of why each company
used the entry mode it did, and whether their choice appears to be appropriate. The analysis/evaluation
should be based on the advantages and disadvantages of the different methods, as discussed in the text.

6.7 Identify the major factors that have a bearing on the type of market entry mode that an export
marketer might select. Is there any one or more that are more important than others? Explain
fully.

The first major factor that influences the market entry mode is the characteristics of the target market. If
the target market is diverse in nature, spread out geographically or buys often but in small quantities, the
system must provide ready access through a variety of sources. It will also tend to be longer and more
complex. Target market preferences should also be considered. Products must be available where
potential customers expect and want them to be. The level of economic development of the target market
is another factor. It affects the type of channels available. The degree of political stability and existence of
legal barriers in the target market are also factors. Levels of risk and complexity are affected and must be
considered when selecting a mode.

The next major factor is the product itself. Many of its attributes may affect the entry mode decision. Unit
value, weight and bulk, technical complexity, and perishability may all have an effect. The familiarity of the
market with the product is also a factor.
The availability and competence of potential channel members both in the home country and foreign
markets may also affect the mode decision. Lack of these may force a producer to consider more direct
forms of exporting or even not entering the market.

Company-related factors include marketing management capability and know-how, newness of the
company to export marketing activities, size of the company and width of its product line, financial
strength and ability to generate capital, management preferences, and extent of control desired. Any of
these can influence the entry mode decision.

Government policies can also be a factor. Regulatory activities and import licensing may affect the access
to markets. Foreign exchange regulations may limit the local importers ability to buy goods. Policies such
as export promotion and local ordinances may serve to predetermine the channel choice.

There is no one factor that is most important under any condition. That is, importance is situation specific.

6.8 Under what conditions would a strategy of multiple entry modes be most appropriate and
under what conditions would it be inappropriate? Discuss.

A strategy of multiple entry modes might be most appropriate: (a) in different countries where the largest
markets have different characteristics (size of market, market structure, and government regulations) or
(b) in a single country where the various products to be sold are expected to have different markets,
market structure, etc. A strategy of multiple entry modes might be inappropriate for companies with only
one product line or one or more similar product lines entering one or more similar foreign markets.

6.9 Why should a company make a specific channel decision for each product going to each
overseas market?

The best (most efficient or most effective) channel is determined by a combination of the characteristics of
the product itself and the characteristics of the market, the structure of distribution for each particular
country, and other considerations such as governmental requirements.

6.10 Select an industrially developed country (perhaps Japan or a European country) and a
relatively less developed country (perhaps a Latin American or African country). Contrast the
relative importance of the factors that should be taken into consideration by a foreign based
manufacturer of a low-unit priced packaged good selling in both markets, when determining
policy on selecting appropriate channels of distribution in those markets. In which case is the
managerial decision easier to make? Discuss.

Answers will differ among the students. The answers should include comparisons of the size of the
market, the requirements of the customers, physical requirements for distribution, availability and
capabilities of marketing organizations, and government regulations.

6.11 How can a company possibly satisfy all five stakeholder groups so each maximizes what it is
trying to maximize. Explain.

Any time an organization (or individual) has more than one stakeholder (or one goal), it is not possible to
completely satisfy (maximize) all stakeholders if any of their objectives are in partial conflict. The
organization has to decide/plan/work to maximize one goal within the constraints of satisfying (to some
acceptable level) the goals of the others.
6.12 Contrast the naive, pragmatic, and strategy approaches to choice of export market entry
mode.

Under the naive rule only one form of foreign market entry is considered. This ignores the differences of
markets and often results in one of two situations. First, entry may be attempted into market for which the
only entry mode is not appropriate or second, a market will be entered with an inappropriate mode.
Either situation produces less than optimal returns.

Under the pragmatic rule, the company enters a market with a low-risk entry mode and only searches for
a new one if it turns out to be not feasible or unprofitable. The advantages are that risk is minimized and
costs of investigating mode alternatives are reduced. This cost reduction results from ending the search
as soon as a workable mode is identified. The cost is the opportunity loss if a less than optimal mode is
chosen.

Under the strategy rule, the company investigates all viable alternative modes. This may result in a trade-
off between market objectives and higher costs. However, the chances of choosing the optimal mode are
maximized.

ANSWERS TO CASE QUESTIONS

6.1 Yang Toyland Pte Limited

1. What advantages and disadvantages would you see for Yang Toyland in signing the proposed
contract with Gross-Versand.

A key factor in any potential arrangement between Yang Toyland and Gross-Versand (G-V) is whether G-
V will follow through and take delivery of the second half of their original order. Only if this happens, will
the investment in additional equipment be justified economically; at least in the short run. Obviously, a
greater amount of sales (in units) either to G-V and/or to other customers needs to continue and even be
increased if the investment is to have long-run benefits. A major risk with this type of arrangement is that
Yang Toyland becomes overly dependent on a single customer, which is particularly disadvantageous
since additional capital equipment is needed. One possible way to hedge against G-Vs not accepting the
remainder of the order is to find a manufacturer in Singapore or elsewhere in Southeast Asia who would
produce units on a contract-manufacturing basis. Of course, G-V would have to approve the quality.

Some advantages to Yang Toyland are derived from the market diversification afforded by the order of G-
V. Doing business with G-V leads to diversification both geographically and in types of distribution outlets.
Risks are thus spread. Another potential advantage is the greater profit that could be generated if G-V
accepts the entire order. Also, Yang can learn about the mail-order methods of distribution that could help
it in exporting to other mail-order houses.

A major disadvantage in signing the contract is the contract itself. It is overly one sided. Everything is to
the advantage and benefit of G-V. Suppliers have no real benefits stated. If a satisfactory relationship
were to be established between Yang Toyland and G-V, then Yang should live with the one-sidedness of
the contract.

If the products sold to G-V are successful, they might be sold through other export and retail distribution
methods. Despite Mrs Mullers comments, the statement of general purchase conditions says only that
mail-order houses cannot be supplied with the products sold to G-V. Y.C. needs to clarify this issue with
Herr Clausen and should insist that only mail-order houses be covered by the agreement.
2. What should be Y.C.s objective in his discussion with Herr Clausen?

Although answers to this question may vary, the major objective is to arrive at an agreement that is
beneficial to both the parties. Y.C. needs to get assurances that the second half of the order will be
accepted as long as the quality of the first shipment meets the specifications. This is the critical point in
the agreement.

3. What topics should Y.C. discuss with Herr Clausen and in which order?

Answers to this question will vary widely depending upon the position a student takes regarding G-Vs
splitting the order and how a student views the one-sidedness of the contract. All topics that are relevant
to arriving at an agreement of mutual benefit should be discussed. There is no single ordering of
importance of such topics.

6.2 Avon Products, Inc. (B)

1. Does it appear that the marketing strategy that Avon used in China from 1998 to 2006 worked
well? Might some other strategy have been more effective?

The strategy has apparently worked well since Avon has received permission to open retail outlets. They
also obtained permission to use sales promoters who do not take title to the merchandise, but are paid
commissions on sales to retail customers. The company also was fortunate to be able to develop a
preferred customer program (see the answer to Question 2 below).

Alternatives of delaying the cessation of the original operations, being more confrontational with the
Chinese government or trying to get the US government to bring more pressure on China, would probably
have soured relations with Chinese officials. This would have been a mistake in a country where personal
relations are often more important than the laws and regulations.

Withdrawing form the Chinese market would have meant the loss of long-run opportunities. Cutting back
on manufacturing there would likely have resulted in seriously damaged relations.

2. Discuss the probable usefulness of the development of the preferred customer program in
the short term and in the longer term for Avon. How do you suppose the program might have
been used by some of the preferred customers?

The preferred customer program has both short- and long-term benefits. In the short run, it allowed for
sales to some of its former representatives at substantial discounts, thereby enabling them to resell the
products at retail for their own account. It thus provided Avon with additional sales, continued contact with
some former representatives, maintained goodwill, and identified individuals who might make worthwhile
employees. In the long run, it provides a possible base for an additional marketing channel as well as
identifying potential employees.

3. What might be the advantages and disadvantages of Avon applying some of the marketing
models it developed in China to other markets?

In the increasingly competitive marketplace, a company cannot rely on the same marketing approach to
succeed. Applying some of the marketing models it developed in China to selected other markets will give
Avon an opportunity to test the applicability and effectiveness of these models elsewhere. It may, in the
long run, prove advantageous to use these new models in combination with or to replace their traditional
direct selling model.
The primary disadvantages are (1) possible loss of focus and identity and (2) possible alienation and loss
of the traditional direct sales representatives in markets where other approaches are introduced.
4. Should Avon continue to experiment with new marketing approaches? What are the possible
costs and benefits?

Avon should continue to experiment with new marketing approaches. Their direct marketing approach
may not continue to work effectively in the present markets as competitive pressures change, and may
not be appropriate in some additional markets that may be entered. The potential benefit is developing
knowledge and abilities that help them remain competitive. The potential costs, aside from the actual
expenses of instituting new marketing methods/channels, are (1) possible loss of focus and identity and
(2) possible alienation and loss of the traditional direct sales representatives in markets where other
approaches are introduced.

5. Was it wise of Avon to return to a direct selling method when the Chinese government allowed
it to do so? Explain.

Avon may not actually have a choice. It appears from the case that the Chinese government wants Avon
to provide a model of direct selling that they may use in drafting new regulations. Thus permission may
really mean a recommendation for action that Avon should not ignore.

In any event, it appears that the return to direct selling will be successful since direct sales are now
increasing without reducing the sales through the Beauty Boutiques.

There is, however, a potential for serious conflict within the organization if the direct sales people (sales
promoters) believe that they are losing sales to the Beauty Boutiques. Most Beauty Boutiques want to
become involved in direct selling while selling in their stores and offering after-sales service to sales
promoters, so the threat is real. Avon will need to find a way to resolve potential conflicts.

6.3 Klako Group

1. Are service companies like the Klako Group most valuable in unique situations like China or
do they have a role in assisting companies wanting to enter markets elsewhere, as, for
instance, the European Union or North America? Explain.

The Klako Group itself enjoys a competitive advantage in assisting companies wanting to enter the
Chinese market and providing a variety of services for companies after they are in the Chinese market.
Because of their connections in other parts of the world, they could offer to assist Chinese companies
interested in entering markets in those areas. But it would require developing extensive new knowledge
and competencies regarding the target markets of Chinese companies.

In general, other service companies like the Klako Group could have a role in assisting companies with
limited international knowledge to develop and implement plans to enter foreign markets. In spite of the
many sources of information available, as discussed in the main book, smaller companies would often
benefit from assistance by a service company that has extensive knowledge of and contacts in their target
market. Problems for the service company would include finding potential clients and convincing them of
the need for assistance.

2. In what ways would you expect the Klako Group to be able to assist a company in finding and
making with (a) a Chinese supplier? (b) a Chinese marketing organization? (c) a Chinese
partner?

Though Klako specializes in providing services within and through Hong Kong, they have offices and
contacts in Shanghai, Beijing, and Shenzhen. They can use their own experiences and their contacts, and
contacts of their contacts, to help find and evaluate Chinese suppliers, marketing organizations, and
potential partners.
TEST BANK
1 Independent organizations in the foreign market:
(a) should always be eliminated to save money/reduce price.
(b) should always be used because they are specialists who save money/reduce price.
(c) should be used where benefit outweigh costs.
(d) All of the above.
(e) None of the above.

2. The whole channel concept in international marketing:

(a) indicates management should find the best international channel for each product.
(b) indicates the channel should be viewed as an integrated system.
(c) includes headquarters organization, channels between nation, and channels within nations.
(d) All of the above.
(e) None of the above.

3. As shown by examples from Japan, eliminating of wholesalers always results in cost reduction and
improved profits.
(a) True
(b) False

4. In considering alternative market entry modes:

(a) indirect exporting is where a manufacturer transfers only the actual activity of selling to some
other organization.
(b) indirect exporting is where the manufacturer uses a dependent organization that is
administratively a part of the manufacturers company organization.
(c) licensing is a form of direct exporting of products.
(d) All of the above.
(e) None of the above.

5. Any particular manufacturer should:

(a) use only one entry mode at a given time.
(b) individual products may require different entry modes, but in a given foreign market area only
one entry mode should be used.
(c) individual market areas may require different entry modes, but only one entry mode should be
used for all products in a given area.
(d) All of the above.
(e) None of the above.
6. An international marketing channel of distribution is a system composed of marketing organizations
that connect the manufacturer to the final users or consumers of the companys product in a foreign
market.
(a) True
(b) False

7. In the interests of efficiency and economies of scale, for any one product a single entry strategy
should be used for every foreign market.
(a) True
(b) False

8. Only in unusual and poorly run companies will management prejudice have any influence on types of
entry mode or channel used.
(a) True
(b) False

9. The international marketer does not necessarily control the choice of all individual firms in the
marketing channel.
(a) True
(b) False

10. Government regulations/taxes/actions regarding e-commerce and the Internet are:

(a) consistent within Europe
(b) have not been enacted/taken in China
(c) are evolving, changing, and vary widely
(d) All of the above
(e) None of the above

11. Various criteria for channel selection may point to different recommendations regarding the approach
that should be used.
(a) True
(b) False

ANSWERS TO TEST BANK QUESTIONS

1. (c) 2. (d) 3. (b) 4. (e) 5. (e) 6. (a) 7. (b) 8. (b) 9. (a)

10. (c) 11. (a)