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Entry and expansion CHAPTER 13

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1 Entry and expansion CHAPTER 13
Visit for the latest in business news stories. Copyright © John Wiley & Sons

2 Chapter 13 Learning Objectives
Learn how firms gradually progress through an internationalization process Understand the strategic affects of internationalization of the firm Study the various modes of entering international markets Understand the role and functions of international intermediaries Learn about the opportunities and challenges of cooperative market development Understand how firms can overcome market barriers by either building competitive capabilities from scratch or through acquisition Observe a model linking managerial commitment, international expansion, and corporate concerns Chapter 13 Learning Objectives 2 Chapter 13 Czinkota: International Business, 8e

3 Market Development Activity Sensitivity Toward Foreign Environments
The Role of Management Dynamism and commitment of managers are essential for international operations The issue of managerial commitment is a critical one because foreign market penetration requires: Going international means that a fundamental strategic change is taking place Market Development Activity Sensitivity Toward Foreign Environments Research Innovation 3 Chapter 13 Czinkota: International Business, 8e

4 The Role of Management Steps in developing international commitment
Become aware of international business opportunities Determine the degree and timing of the firm’s internationalization International orientation grows over time Management is often too preoccupied with short-term issues to engage in long-term planning Unsolicited orders – Unplanned business opportunities that arise as a result of another firm’s activities Accidental exporters – Firms which participate in international trade due to active outside demand rather than inside planning 4 Chapter 13 Czinkota: International Business, 8e

5 Motivations to Go Abroad
Proactive Motivations Reactive Motivations Profit advantage Unique products Technological advantage Exclusive information Tax benefit Economies of scale Competitive pressures Overproduction Declining domestic sales Excess capacity Saturated domestic markets Proximity to customers and ports (physical and psychological distance) 5 Chapter 13 Czinkota: International Business, 8e

6 Focus on Entrepreneurship: An International Bug
Tierra Dynamic, a Phoenix-based environmental cleanup company, has successfully entered world markets. First, the company developed a bacteria that eats spilled hydrocarbons at an accelerated rate and then discovered a void in the world market for the bacteria. Next the company identified locations needing cleanup and found local partners in those locations. The company then set up shop on foreign soil to take advantage of these market opportunities. 6 Chapter 13 Czinkota: International Business, 8e

7 Strategic Affects of Going International
Wide range of Issues to Consider: Service delivery Strategic considerations such as government regulation compliance Start-up issues such as communication with customers Operational matters such as information flows and mechanics Companies must determine their preparedness for internationalization by assessing strengths and weaknesses Understanding the changes in risk and profitability can help management overcome the cost of going international 7 Chapter 13 Czinkota: International Business, 8e

8 Telecom Companies Find New Revenue in Global Markets
As the nation’s economy has faltered in 2008 and 2009, many U.S. companies have started looking overseas both to cut costs and to increase growth. While the downturn has had an impact beyond our borders, surveys of U.S.-based multinationals indicate only a slowing of the meteoric pace of globalization that has characterized this decade to date. In other words, their overseas expansion continues in earnest. For telecom agents feeling the squeeze on domestic business, helping more U.S. companies go global or improve their global operations by supporting their telecommunications infrastructure requirements may be an opportunity they can no longer afford to ignore. Source: Phone Plus Magazine: 8 Chapter 13 Czinkota: International Business, 8e

9 Entry Development Strategies for Exporting and Importing
Indirect involvement – Use of an intermediary to deal with foreign customers or firms Direct involvement – Working with foreign customers or markets with the opportunity to develop a relationship Transaction cost theory – Firms will evaluate and compare the costs of integrating an operation internally as compared to the cost of going global Some firms are born global, starting out with an international orientation or quickly developing one 9 Chapter 13 Czinkota: International Business, 8e

10 How a Trade Intermediary Can Offer Assistance
Knows foreign market competitive conditions Has personal contacts with potential foreign buyers Evaluates credit risk associated with foreign buyers Has sales staff to call on current foreign customers in person Assumes responsibility for physical delivery of product to foreign buyer 10 Chapter 13 Czinkota: International Business, 8e

11 Export Management Companies
EMCs specialize in performing services as commission representatives or distributors EMC Roles: Agent – Developing foreign business and sales strategies Distributor – Purchasing products and assuming trading risk Compensation of EMCs Fee for activities performed as a retainer Price break for international sales Power Conflicts Between EMCs and Clients Once a foreign market is penetrated, the EMC faces the continuous problem of retaining a client Clear arrangements must be made to avoid or minimize conflict 11 Chapter 13 Czinkota: International Business, 8e

12 Tradewinds Global Tradewinds Global is an export management company representing the export sales of North American manufacturers into international markets. The company serves as a liaison and consultant between the manufacturer who is looking to expand into foreign markets and foreign buyers seeking to purchase consumer goods from U.S. and Canadian manufacturers. Located in Oahu, Hawaii, Tradewinds is ideally situated to facilitate trade between North American firms and those within the emerging economies in Southeast Asia. Source: Tradewinds Web Site: 12 Chapter 13 Czinkota: International Business, 8e

13 Trading Companies Concept made popular by the European trading houses from earlier centuries Japanese sogoshosha is the most successful trading company Expansion of Trading Companies An export trading company allows businesses to band together to export or offer export services Export trading company legislation is designed to improve the export performance of small and medium-sized firms Banks can participate in ETCs, allowing better access to capital and making trading transactions easier to accomplish 13 Chapter 13 Czinkota: International Business, 8e

14 Private-Sector Facilitators
Supply knowledge and information, but do not participate in the transaction Come from both the private and public sector Private sector facilitators include: Distributors Other Firms in the Industry Banks and Other Service Firms Chambers of Commerce Other Business Associations 14 Chapter 13 Czinkota: International Business, 8e

15 Public-Sector Facilitators
Small Business Administration U.S. Department of Commerce Export-Import Bank State and Local Organizations Educational Institutions 15 Chapter 13 Czinkota: International Business, 8e

16 Licensing International Licensing:
A firm permits another to use its intellectual property for a royalty Does not require capital investment or detailed involvement Exploits research and development that has already been conducted Avoids host-country regulations and cultural problems Allows a company to test the market Trademark licensing – Permits the names or logos to be used on products in exchange for payment Disadvantages: Limited form of foreign market participation May actually hinder future expansion A company could create its own future competitor 16 Chapter 13 Czinkota: International Business, 8e

17 Focus on Culture: TV Program Licenses are International
With the privatization of many state-run television enterprises during the 1980s, most markets abroad have relied on American-produced TV shows to fill their airtime because of a lack of knowledge and skills to create television programs independently. Over time, the situation abroad has changed, and local stations have become more adept at developing and producing their own programming. 17 Chapter 13 Czinkota: International Business, 8e

18 Franchising Granting the right by a parent company (the franchisor) to an independent entity (the franchisee) to do business Major forms of franchising: Manufacturer-retailer systems (e.g. car dealerships) Manufacturer wholesaler systems (e.g. soft drink companies) Service-firm retailer systems (e.g. fast-food outlets) Keys to Success Offer unique products or selling propositions Offer a high degree of standardization Be adaptable to local circumstances Reasons for the international expansion: Market potential Financial gain Saturated domestic markets 18 Chapter 13 Czinkota: International Business, 8e

19 Inter-firm Cooperation
Strategic Alliances with suppliers, customers, competitors, and companies in other industries Reasons for Interfirm Cooperation Market development To share risks To share resource requirements To block and co-opt competitors Types of Interfirm Cooperation Informal Cooperation – Partners work together without a binding agreement Contractual Agreements – Joint efforts in specific areas or for outsourcing 19 Chapter 13 Czinkota: International Business, 8e

20 Types of Inter-firm Cooperation
Contractual Agreements Informal Cooperation Equity Participation Joint Venture Consortia 20 Chapter 13 Czinkota: International Business, 8e

21 Stateless Corporations
In the 1990s, a new type of company emerged in global business: The stateless corporation developed products in several countries, practiced diversity, and had shareholders on numerous continents long before traditional companies adopted these practices. These companies established joint ventures, partnerships, and other significant changes in operations to take advantages of the benefits of going global. These benefits include: Solving trade problems Avoiding political problems Side-stepping regulatory hurdles Winning technology breakthroughs By taking advantage of the benefits of global operations, these companies set the stage for today’s multinational corporations. Source: AllBusiness: 21 Chapter 13 Czinkota: International Business, 8e

22 Managerial Considerations
Find the right partner first The more formal the arrangement, the greater the care that needs to be taken in negotiating the agreement The cultures of the two parties must be blended Must be able to adjust to changing market conditions Must consider government attitudes and policies 22 Chapter 13 Czinkota: International Business, 8e

23 Full Ownership Company may believe that no outside entity should have an impact on corporate decision making (ethnocentric view) Ownership decision could be based on financial concerns Consider how important total control is to success Increasingly, the international environment is hostile to full ownership by MNCs 23 Chapter 13 Czinkota: International Business, 8e

24 A Comprehensive View of International Expansion
Domestic Focus Concerns Information Mechanics Communication Sales Effort Service Regulations Stages of Management Commitment Aware Interested Trial Evaluation Adaptation Alternate Strategies Trading Export/ Import Licensing/ Franchising Local Presence Alliances Ownership Motivation Proactive Reactive Multi-National Focus Intermediaries EMC Trading Companies Facilitators 24 Chapter 13 Czinkota: International Business, 8e

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