FMA 6043Chapter 12

Strategies for Analyzing and Strategies for Analyzing and Entering Foreign MarketsEntering Foreign Markets

Entry Modes

An entry mode is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market.

The specific mode chosen depends on many factors, including experience in a market, amount of control managers desire, and potential size of the market

Entry Modes

Three categories of entry modes available to companies:Exporting, importing, and counter tradeContractual entry Investment entry

Why Companies Export

Expand sales Diversify Sales Gain Experience

Companies often drawn into exporting when customers in other countries solicit their goods

Companies should not fall into the habit of simply responding to random international request – instead a more logical approach to research and analyze international opportunities and develop a coherent export strategy is needed

Step 1 Step 2

Identify a potential market

Match needs to abilities

Step 3

Initiatemeetings

Developing an Export Strategy

Step 4

Commit resources

Degree of Export Involvement

Direct exportingDirect exporting(sell to buyers)(sell to buyers)

Indirect exportingIndirect exporting(sell to intermediaries)(sell to intermediaries)

• Sales representatives

• Distributors

• Sales representatives

• Distributors

• Agents• Export management companies• Export trading companies

• Agents• Export management companies• Export trading companies

Indirect Exporting Agents

Represent one or more indirect exporters in a target market Typically receive compensation in the form of commissions on

value of sales Careful selection is essential because agents often represent

several indirect exporters simultaneously Export Management Companies (EMC)

Export products on behalf of an indirect exporter Operate contractually, either as an agent or as a distributor

(taking ownership of the merchandise and earning a profit from its resale)

EMC services include gathering market information, formulating promotional strategies, performing specific promotional duties, researching customer credit, making shipment arrangement, and coordinating export documents

Indirect Exporting Export Trading Companies (ETC)

Provide services to indirect exporters in addition to activities directly related to client’s exporting activities

Whereas EMC is restricted to export-related activities, an ETC assists its clients by providing import, export, and countertrade services, developing and expanding distribution channels, providing storage facilities, financing trading and investment projects, and even manufacturing products

Examples include sogo shosha,chaebol

Avoiding Export BlundersAvoiding Export Blunders

Conduct market researchConduct market researchConduct market researchConduct market research

Obtain export adviceObtain export adviceObtain export adviceObtain export advice

Consider a freight forwarderConsider a freight forwarderConsider a freight forwarderConsider a freight forwarder

Forms of Countertrade

Barter

Counterpurchase

Offset agreement

Switch trading

Buyback

Direct exchange without money

Sale to a country in return for promise of future purchase from it

Offset a hard-currency sale to a nationwith future hard-currency purchase

Sale by a company of an obligation to purchase from a country

Export of industrial equipment in return for products the equipment produces

Export/Import Financing

High-Risk Approaches

Advance paymentAdvance payment

Importer pays exporterImporter pays exporter for merchandisefor merchandise before it shipsbefore it ships

Advance paymentAdvance payment

Importer pays exporterImporter pays exporter for merchandisefor merchandise before it shipsbefore it ships

Open accountOpen account

Exporter shipsExporter ships merchandise andmerchandise and later bills importerlater bills importer

Open accountOpen account

Exporter shipsExporter ships merchandise andmerchandise and later bills importerlater bills importer

Documentary Collection

Draft (bill of exchange) Bill of lading

Bank acts as intermediary without accepting financial risk

Document that orders an importer to pay an exporter a specified sum of money at a specified time

Contract between an exporter and shipperspecifying destinationand shipping costsfor merchandise

Documentary Collection Process

Letter of Credit

Importer’s bank issues a document stating that the bank will pay the exporter when exporter

fulfills document’s terms

Irrevocable Revocable Confirmed

Letter of Credit Process

Licensing

AdvantagesAdvantages

+ Finance expansionFinance expansion+ Reduce riskReduce risk+ Reduce counterfeitsReduce counterfeits+ Upgrade technologiesUpgrade technologies

– Restrict licensor’s futureRestrict licensor’s future– Reduce global consistencyReduce global consistency– Lend strategic propertyLend strategic property

DisadvantagesDisadvantages

Company owning intangible property (licensor) grantsCompany owning intangible property (licensor) grantsanother firm (licensee) the right to use it for a specified timeanother firm (licensee) the right to use it for a specified time

Franchising

AdvantagesAdvantages+ Low cost and low riskLow cost and low risk+ Rapid expansionRapid expansion+ Local knowledgeLocal knowledge

– CumbersomeCumbersome– Lost flexibilityLost flexibilityDisadvantagesDisadvantages

Company (franchiser) supplies another (franchisee)Company (franchiser) supplies another (franchisee)with intangible property over an extended periodwith intangible property over an extended period

Management Contract

Company supplies another withCompany supplies another withmanagerial expertise for amanagerial expertise for a

specific period of timespecific period of time

AdvantagesAdvantages

+ Few assets riskedFew assets risked+ Nations finance projectsNations finance projects+ Develops local workforceDevelops local workforce

DisadvantagesDisadvantages

– Personnel at riskPersonnel at risk– Create competitorCreate competitor

Turnkey Project

AdvantagesAdvantages+ Firms specialize in coreFirms specialize in core

competencycompetency

+ Nations obtain infrastructureNations obtain infrastructure projectsprojects

– Politicized processPoliticized process

– Create competitorCreate competitorDisadvantagesDisadvantages

Company designs, constructs, and testsCompany designs, constructs, and testsa production facility for a clienta production facility for a client

Wholly Owned Subsidiary

Facility entirelyFacility entirelyowned and controlledowned and controlled

by a single parent companyby a single parent company

AdvantagesAdvantages

+ Day-to-day controlDay-to-day control+ Coordinate subsidiariesCoordinate subsidiaries

DisadvantagesDisadvantages

– Expensive– High risk

Joint Venture

Separate company created and jointly owned by two or more Separate company created and jointly owned by two or more independent entities to achieve a common business objective independent entities to achieve a common business objective

Forward • Backward • Buyback • MultistageForward • Backward • Buyback • Multistage

Advantages

• Reduce risk level• Penetrate markets• Access channels• Protect interests

Disadvantages

• Partner conflict• Lose control

Strategic Alliance

DisadvantagesCreate competitor

Partner conflict

Advantages Share project cost

Tap competitors’ strengths Gain channel access

Protect interests

Entities cooperate (but do not form a separate Entities cooperate (but do not form a separate company) to achieve strategic goals of eachcompany) to achieve strategic goals of each

Entry Modes: Strategic FactorsEntry Modes: Strategic Factors

Cultural environmentCultural environmentCultural environmentCultural environment

Political/Legal environmentsPolitical/Legal environmentsPolitical/Legal environmentsPolitical/Legal environments

Market sizeMarket sizeMarket sizeMarket size

Production and shipping costsProduction and shipping costsProduction and shipping costsProduction and shipping costs

International experienceInternational experienceInternational experienceInternational experience

Risk, Control, Experience