INTERNATIONAL BUSINESS MANAGEMENT

TYPES & FORMS

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Learning Objectives
Explain the international market entry methods Discuss the debate on whether being a market pioneer or a fast follower is most useful Discuss channel members available to companies that export or manufacture overseas

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Types of Foreign Market Entry Strategies

1. International transactions that involve the exchange of products: Home based international trade activities such as global sourcing, exporting, and countertrade. 2. Equity or ownership-based international business activities: Include FDI and equitybased collaborative ventures. 3. Contractual relationships: Include licensing and franchising, strategic alliance, contract manufacturing
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Types of Foreign Market Entry Strategies

1. Exporting Direct and indirect. 2. Contractual 1. Licensing / Franchising 2. Strategic alliance 3. Contract manufacturing 3. M&A 4. Production / Assembly facility in foreign market 1. Assembly operation 2. Wholly owned manufacturing 3. JVs

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a.velsamy, sona school of management

TYPES / MODES OF INTERNATIONAL BUSINESS Internal strategies: Using your own assets 1. Exporting 2. Licensing 3. Contract manufacturing 4. Franchising 5. Management contracting 6. Turnkey contracts 7. Joint Ventures 8. Third country location 9. Sales Office 10. Production Plant 11. Full Scale Subsidiaries 12. Turnkey contracts

External strategies: Combining you and your partners assets Corporate Networks Mergers and acquisition Strategic Alliances ( International Management )

Domestic [%] 100 1. Export 2. Licensing 3. Franchising

4. Joint Venture & Strategic Alliances

5. Sales Office 6. Production Plant 7. Full Scale Subsidiary 8. Turnkey Contract

100 Foreign [%]

Factors Relevant to Choice of Foreign Market Entry Strategy

1. 2. 3. 4. 5. 6. The goals and objectives of the firm, such as desired profitability, market share, or competitive positioning; The firms financial, organizational, and technological resources and capabilities; Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems; Risks inherent in each proposed foreign venture; The nature and extent of competition from existing and potential rivals; The characteristics of the product or service to be offered to customers in the market (e.g., glass, yogurt, tires, copy machines)
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Pioneers vs. Fast Followers

Pioneers
Can gain and maintain competitive edge in new market Overall pioneers may not perform as well in the long run as followers

Followers
Many become followers by default May be advantage to let pioneer take initial risks

Most successful when

High entry barriers exist Firm has sufficient size, resources, and competencies

Most successful when

Few legal, technological, cultural, or financial barriers Sufficient resources or competencies to overwhelm the pioneers early advantage
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Direct Exporting
Exporting of goods and services by the producing firm Sales company option
Business established to market goods and services

Internet has made direct exporting much easier

Cost of trial low

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Indirect Exporting
Exporting of goods and services through various home-based exporters
Manufacturers export agents
sell for manufacturer

Export commission agents

buy for overseas customers

Export merchants
purchase and sell for own accounts

International firms
use the goods overseas
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Indirect Exporting, contd.

Disadvantages
Commission to export agents, commission agents, export merchants

Foreign business can be lost if exporters decide to change their sources and supply Firm gains little experience from transactions

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Advantages of Exporting
Increase sales and profits Increase economies of scale Diversify customer base, reducing dependence on the home market Stabilize fluctuations in sales associated with economic cycles or seasonality Low cost entry strategy Minimal risk Maximal flexibility Develop useful foreign relationships
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Disadvantages of Exporting
Requires firm to acquire new capabilities and redirect organizational resources Sensitive to tariffs and other trade barriers

Sensitive to exchange rate fluctuations

Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace

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Licensing
Licensing
A contractual arrangement: one firm sells access to its patents, trade secrets, or technology to another Licensee pays fixed sum and sales royalties (2%-5%)

Popular because
Courts have begun upholding patent infringement claims Patent holders have become vigilant in suing violators Foreign governments have been pressed to enforce their patent laws

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Franchising
Franchising
Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules

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Contracts
Management Contract
Arrangement by which one firm provides management in all or specific areas to another firm

Contract Manufacturing
Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing

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Equity-Based Modes of Entry

Wholly Owned Subsidiary Joint Venture Strategic Alliance

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Wholly Owned Subsidiary

Wholly Owned Subsidiary
build a new plant (greenfield investment) acquire a going concern purchase distributor, to obtain a distribution network familiar with products

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Joint Venture
Joint Venture
Cooperative effort among two or more organizations that share common interest in business enterprise
corporate entity formed by international company and local owners corporate entity formed by two international companies for the purpose of doing business in a third market a corporate entity formed by a government

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Joint Venture, contd.

Disadvantages
Profits shared If law allows no more than 49% foreign ownership, lose control Control with minority ownership is possible if
Take 49% of shares and give 2% to local law firm or trusted national Take in local majority partner (sleeping partner) Management contract
Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

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Strategic Alliances
Partnerships between competitor, customers, or suppliers that may take various forms Aims to achieve
Faster market entry and start-up Access to new
Products Technologies Markets Costs Resources Risks
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Cost-savings by sharing

Strategic Alliances, contd.

May be Joint Ventures

Pooling alliances driven by

similarity and integration Trading alliances driven by contribution of dissimilar resources Alternatives to mergers and acquisitions

Future of Alliances Many fail or are taken over by a partner Difficult to manage
Different strategies Different operating practices Different organizational cultures

Allow partner to acquire technological or other competencies Regardless, will continue to be important strategic tool

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International Channels of Distribution

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Form

What's sold

What's received

Pro's

Con's

Exporting

physical product

sales price (or countertrade)

1) the only changes 1) susceptibility to trade from domestic barriers; operations entail foreign 2) logistical difficulties; marketing and 3) less suitable for documentation; service products 2) little investment -- 4) susceptibility to typically no investment exchange-rate abroad fluctuation 1) the agreement generally prohibits the originating firm from exploiting the assets in particular foreign markets; 2) quality control

Licensing

Franchising

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1) increases return on investments in technical info, licensing fee, and technology, creativity, assistance, and/or use commitment to use the or customer relations; rights info or rights 2) little additional capital or time investment 1) important way of gaining foreign returns on certain kinds of payment for trademark, on-going customer-service and trademark; payment for service, some inputs, tradename assets; 2) inputs used; share of shared marketing some control over the operating revenues or expense conditions of sale in the profits foreign market; 3) limited financial a.velsamy, sona school of management commitment

quality control

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Management Contracts

1) contractor puts up salary, benefits, and no capital and bears people, for a period indirect costs; share no risk; 2) useful in of time of operating foreign contexts that revenues or profits prohibit (or are too risky for) FDI

contractee will become a competitor, at least in the local market

1) contractor bears all costs plus fees; design, construction, no risk; 2) useful in assumption of Turnkey Operation and equipping of a foreign contexts that ownership and risk at production facility prohibit (or are too end of project risky for) FDI

contractee will become a competitor, at least in the local market

Contract Arrangements

expertise, financing, inputs available in materials, or finished the foreign country product

avoids currency may be difficult to controls and foreign- negotiate a fair exchange risk arrangement

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Foreign Direct Investment

1) control; 2) capital, repatriated profit; 3) possibility management, profit; licensing capital and operating of tax avoidance technology; perhaps fees; transfer commitment through transfer key material inputs payments for inputs pricing
1) smaller investment; 2) local marketing and less control over the production/ operation procurement expertise from local partner 1) larger commitment; 2) perceived as a competitor by local producers (if any); 3) risk of national expropriation
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-- joint ownership

see above

see above

-- sole ownership

see above

see above

total control and returns

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See you again

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