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Chapter 13 Entry Modes McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Presentation on theme: "Chapter 13 Entry Modes McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved."— Presentation transcript:

1 Chapter 13 Entry Modes McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Exporting Pioneer or Fast Follower Which is Better? Pioneers succeed in exporting when –Insulated from competitor entry –Strong patent protection proprietary technology –Big investment requirements –Has size, resources and competencies (R&D, marketing) to leverage pioneering position Pioneers succeed in exporting when –Insulated from competitor entry –Strong patent protection proprietary technology –Big investment requirements –Has size, resources and competencies (R&D, marketing) to leverage pioneering position Fast Followers will succeed when –Few legal, financial, and cultural barriers exist –Sufficient resources and competencies to overwhelm pioneers early advantage –Larger resource base than Pioneer to reduce unit costs and offer lower prices Fast Followers will succeed when –Few legal, financial, and cultural barriers exist –Sufficient resources and competencies to overwhelm pioneers early advantage –Larger resource base than Pioneer to reduce unit costs and offer lower prices LO1 13-2

3 Nonequity Modes of Entry Starts with Exporting: –Selling some regular production overseas –Requires little investment –Relatively free of risk The next choices: –Indirect Exporting –Direct Exporting Or: –Turnkey Projects –Licensing –Franchising –Management Contracts –Contract Manufacturing Starts with Exporting: –Selling some regular production overseas –Requires little investment –Relatively free of risk The next choices: –Indirect Exporting –Direct Exporting Or: –Turnkey Projects –Licensing –Franchising –Management Contracts –Contract Manufacturing LO2 13-3

4 Nonequity Modes of Entry Indirect exporting done through home-country based exporters –No special expertise –No large cash outlay Called in the trade as: –Manufacturers Export Agents sell for the manufacturer –Export Commission Agents buy for overseas customers –Export Merchants purchase and sell for own accounts –International Firms Use their own goods abroad Indirect exporting done through home-country based exporters –No special expertise –No large cash outlay Called in the trade as: –Manufacturers Export Agents sell for the manufacturer –Export Commission Agents buy for overseas customers –Export Merchants purchase and sell for own accounts –International Firms Use their own goods abroad Costs of indirect exporting: –Commissions –Lost foreign business if exporters change suppliers –Exporters gain little international experience Costs of indirect exporting: –Commissions –Lost foreign business if exporters change suppliers –Exporters gain little international experience LO2 13-4

5 Direct Exporting Direct Exporting: –the exporting of goods and services by a firm that produces them –Initial responsibility done internally – sales manager –Sales company may be set up –Internet makes direct exporting easier High level investment for international presence Cost of trial is low Direct Exporting: –the exporting of goods and services by a firm that produces them –Initial responsibility done internally – sales manager –Sales company may be set up –Internet makes direct exporting easier High level investment for international presence Cost of trial is low LO2 13-5

6 Turnkey Projects Turnkey projects are used to export: –technology –management expertise –capital equipment (some cases) Exporter of a turnkey project may be a: –contractor that specializes in designing and erecting plants in a particular industry After a trial run, the facility is turned over to the purchaser –company that wishes to earn money from its expertise –producer of a factory Turnkey projects are used to export: –technology –management expertise –capital equipment (some cases) Exporter of a turnkey project may be a: –contractor that specializes in designing and erecting plants in a particular industry After a trial run, the facility is turned over to the purchaser –company that wishes to earn money from its expertise –producer of a factory LO2 13-6

7 Licensing – a contractual arrangement in which one firm (licensor) grants access to its patents, trade secrets, or technology to another (licensee) for a fee –Licensee pays fixed sum and sales royalties (2%-5%) over life of contract with renewal option Anything can be licensed – technology, brand & manufacturer names, logos, symbols, colors Licensing is attractive because: –courts have begun upholding patent infringement claims –patent holders have started suing violators –foreign governments have begun enforcement of their patent laws A Licensee may become a competitor! LO2 13-7

8 Piracy Patent Infringement Intellectual property protection: –courts have begun upholding patent infringement claims –patent holders have started suing violators –foreign governments have begun enforcement of their patent laws Patent Infringement Intellectual property protection: –courts have begun upholding patent infringement claims –patent holders have started suing violators –foreign governments have begun enforcement of their patent laws Traditional Piracy –Attack on defenseless sailing vessels, theft of cargo and/or ship on the high seas Pirates can be: –International terrorists –Organized crime –Poor local fisherman Locations: –Waters around Indonesia, Nigeria, Somalia, Bangladesh & Caribbean Traditional Piracy –Attack on defenseless sailing vessels, theft of cargo and/or ship on the high seas Pirates can be: –International terrorists –Organized crime –Poor local fisherman Locations: –Waters around Indonesia, Nigeria, Somalia, Bangladesh & Caribbean LO3 13-8

9 Franchising Franchising: – a form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules The franchisee gets: –Publicized brand name –Well-known set of procedures –carefully developed & controlled controlled marketing plan Franchising: – a form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules The franchisee gets: –Publicized brand name –Well-known set of procedures –carefully developed & controlled controlled marketing plan LO2 13-9

10 Management Contract – An arrangement by which one firm provides management in all or specific areas to another firm –Typical fee is 2-5% of annual sales and tax deductable MNCs make contracts with: –Other firms with no ownership interest –Joint venture partners –Wholly owned subsidiaries Management Contract – An arrangement by which one firm provides management in all or specific areas to another firm –Typical fee is 2-5% of annual sales and tax deductable MNCs make contracts with: –Other firms with no ownership interest –Joint venture partners –Wholly owned subsidiaries LO

11 Contract Manufacturing – An arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing Other types of: –Subcontract assembly or parts production –Lend capital to 3 rd party foreign contractor Called foreign direct investment without investment Contract Manufacturing – An arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing Other types of: –Subcontract assembly or parts production –Lend capital to 3 rd party foreign contractor Called foreign direct investment without investment LO

12 Equity-Based Modes of Entry 1.Wholly Owned Subsidiary 2.Joint Venture 3.Strategic Alliances 1.Wholly Owned Subsidiary 2.Joint Venture 3.Strategic Alliances Wholly Owned Subsidiary 1.Start from the ground up by building a new plant (greenfield investment) 2.Acquire a going concern 3.Purchase its distributor to obtain a distribution network familiar with its products Wholly Owned Subsidiary 1.Start from the ground up by building a new plant (greenfield investment) 2.Acquire a going concern 3.Purchase its distributor to obtain a distribution network familiar with its products LO

13 Joint Venture 1.Joint Venture – A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking 1.Joint Venture – A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking 1.A corporate entity formed by an international company and local owners; 2.A corporate entity formed by two international companies for the purpose of doing business in a third market; 3.A corporate entity formed by a government agency (usually in the country of investment) and an international firm; or 4.A cooperative undertaking between two or more firms of a limited-duration project. 1.A corporate entity formed by an international company and local owners; 2.A corporate entity formed by two international companies for the purpose of doing business in a third market; 3.A corporate entity formed by a government agency (usually in the country of investment) and an international firm; or 4.A cooperative undertaking between two or more firms of a limited-duration project. LO

14 Issues with Venture Ventures Strong nationalism Expertise, tax & other benefits Disadvantages: –Shared profits –Minority ownership position –Difficulty in share distribution to allow minority owner to be largest stockholder –Lack of control –Local law requiring local majority ownership –Joint venture control through management contracts Strong nationalism Expertise, tax & other benefits Disadvantages: –Shared profits –Minority ownership position –Difficulty in share distribution to allow minority owner to be largest stockholder –Lack of control –Local law requiring local majority ownership –Joint venture control through management contracts LO

15 Strategic Alliances – partnerships between or among competitors, customers, or suppliers that may take one or more various forms, both equity and nonequity Goals of Strategic Alliances: –Faster market entry and start-up –Access to new products, technologies, and markets –Cost-savings by sharing costs, resources, and risks Issues with Strategic Alliances: –Alliances may be Joint Ventures –Pooling versus Trading Alliances –Alliances versus Mergers and Acquisitions –Future of Alliances LO

16 Issues with Strategic Alliances Strategic Alliances may be Joint Ventures –In manufacturing and marketing Pooling versus Trading Alliances –Pooling Alliances – driven by similarity and integration –Trading Alliances –driven by the logic of contributing dissimilar resources –Fundamental differences: Goals (common vs. compatible) Optimal resources (many vs. few partners) Managerial challenges (low vs. high coordination needs) Alliances versus Mergers and Acquisitions –Mergers and acquisitions not considered alliances, but ways to access new technology Future of Alliances –Many fail or are taken over by a partner –Difficult to manage due to different strategies, operating practices, and organizational cultures –Partner may acquire technological or other competencies and become competitor Strategic Alliances may be Joint Ventures –In manufacturing and marketing Pooling versus Trading Alliances –Pooling Alliances – driven by similarity and integration –Trading Alliances –driven by the logic of contributing dissimilar resources –Fundamental differences: Goals (common vs. compatible) Optimal resources (many vs. few partners) Managerial challenges (low vs. high coordination needs) Alliances versus Mergers and Acquisitions –Mergers and acquisitions not considered alliances, but ways to access new technology Future of Alliances –Many fail or are taken over by a partner –Difficult to manage due to different strategies, operating practices, and organizational cultures –Partner may acquire technological or other competencies and become competitor LO

17 Reasons to Export To serve markets where the firm has no or limited production facilities. To satisfy a host governments requirements that the local subsidiary have exports. To remain price competitive in the home market. To test foreign markets and foreign competition inexpensively. To meet actual or prospective customer requests for the firm to export. To offset cyclical sales in the domestic market. To serve markets where the firm has no or limited production facilities. To satisfy a host governments requirements that the local subsidiary have exports. To remain price competitive in the home market. To test foreign markets and foreign competition inexpensively. To meet actual or prospective customer requests for the firm to export. To offset cyclical sales in the domestic market. LO

18 Reasons to Export To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs. To extend a products life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle. To respond strategically to foreign competitors that are in the firms home market by entering their home market. To achieve the success the firms management has seen others achieve by exporting. To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity. To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs. To extend a products life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle. To respond strategically to foreign competitors that are in the firms home market by entering their home market. To achieve the success the firms management has seen others achieve by exporting. To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity. LO


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