1. Global Market Entry Strategies

2. Copyright © Houghton Mifflin Company. All rights reserved. 9-2 Discussion Outline Exporting as an entry strategy Exporting as an entry strategy Indirect exporting, direct exporting Indirect exporting, direct exporting Foreign production as an entry strategy Foreign production as an entry strategy Licensing, franchising, local manufacturing Licensing, franchising, local manufacturing Ownership strategies Ownership strategies Wholly owned subsidiaries, JVs, alliances Wholly owned subsidiaries, JVs, alliances Entering markets through mergers & acquisitions Entering markets through mergers & acquisitions

3. Copyright © Houghton Mifflin Company. All rights reserved. 9-3 2 Methods of Exporting Indirect - Reaching markets with the use of an intermediary located in the exporter’s home country Indirect - Reaching markets with the use of an intermediary located in the exporter’s home country Leverage intermediary’s expertise Leverage intermediary’s expertise Good for firms with little international experience Good for firms with little international experience - Less profit, less control, do not gain experience curve effects

4. Copyright © Houghton Mifflin Company. All rights reserved. 9-4 Intermediaries for Indirect Exporting Export Management Company (EMC) Export Management Company (EMC) Handles all aspects of export operations Handles all aspects of export operations Marketing research, patent protection, channel credit, shipping, logistics, and actual marketing of product Marketing research, patent protection, channel credit, shipping, logistics, and actual marketing of product Can act as merchant (taking title of product) or as agent (receiving fee or commission on product sale) Can act as merchant (taking title of product) or as agent (receiving fee or commission on product sale)

5. Copyright © Houghton Mifflin Company. All rights reserved. 9-5 Intermediaries for Indirect Exporting Export Agents Export Agents Individuals or firms that assist manufacturers in exporting goods Individuals or firms that assist manufacturers in exporting goods Similar to EMCs; but tend to provide more limited services and focus on 1 country or part of the world Similar to EMCs; but tend to provide more limited services and focus on 1 country or part of the world Focus more on sale and handling of goods Focus more on sale and handling of goods Exporting firms may need to utilize several export agents to gain adequate worldwide market coverage Exporting firms may need to utilize several export agents to gain adequate worldwide market coverage

6. Copyright © Houghton Mifflin Company. All rights reserved. 9-6 2 Methods of Exporting Direct – Reaching markets either yourself or with the use of an intermediary located in the foreign market +M+M+M+More profit, greater control, able to leverage experience curve effects -R-R-R-Requires more expertise, management time, and financial resources

7. Copyright © Houghton Mifflin Company. All rights reserved. 9-7 Direct Export Options Independent Distributor Independent Distributor No direct cost to exporter; takes margin on selling price of products No direct cost to exporter; takes margin on selling price of products Marketing Subsidiary Marketing Subsidiary Initial and fixed costs to establish and maintain subsidiary Initial and fixed costs to establish and maintain subsidiary Manager, sales manager, clerical staff, warehousing operation, etc. Manager, sales manager, clerical staff, warehousing operation, etc. LESS PER-UNIT PROFIT USEFUL IF VOLUME LOW MORE PER-UNIT PROFIT USEFUL IF VOLUME HIGH

8. Copyright © Houghton Mifflin Company. All rights reserved. 9-8 Foreign Production Firms may shift production to foreign markets Firms may shift production to foreign markets 1. Gain market position Circumvent import restrictions, communicate commitment to market Circumvent import restrictions, communicate commitment to market 2. Defend market position Response to protectionism, currency fluctuations Response to protectionism, currency fluctuations Follow the customer Follow the customer 3. Save costs Cheaper production factors, decrease transportation costs, etc. Cheaper production factors, decrease transportation costs, etc.

9. Copyright © Houghton Mifflin Company. All rights reserved. 9-9 Types of Foreign Production Licensing – Company assigns the right to a copyright or patent and/or trademark to another company for a fee or royalty (% sales volume) Licensing – Company assigns the right to a copyright or patent and/or trademark to another company for a fee or royalty (% sales volume)

10. Copyright © Houghton Mifflin Company. All rights reserved. 9-10 Pros and Cons of Licensing + Leverage local knowledge of licensee + Commercial and political risks absorbed by licensee + Allows resources to be concentrated in more lucrative markets + Adds to firm’s manufacturing capacity + Enables firms to enter several markets quickly - Possibility of creating a competitor - Dependence on licensee - Uncertainty of licensee’s marketing capabilities and product quality - Management time and resources

11. Copyright © Houghton Mifflin Company. All rights reserved. 9-11 Foreign Production Franchising – Special type of licensing where company makes total marketing plan available, including brand name, logo, products, and methods of operation. Franchising – Special type of licensing where company makes total marketing plan available, including brand name, logo, products, and methods of operation. 15,000 franchising companies worldwide 15,000 franchising companies worldwide U.S. is home to the greatest number of franchisers U.S. is home to the greatest number of franchisers Growth rates for franchising are higher in non-U.S. markets Growth rates for franchising are higher in non-U.S. markets Master franchises – exclusive rights to a whole city or country Master franchises – exclusive rights to a whole city or country

12. Copyright © Houghton Mifflin Company. All rights reserved. 9-12 Foreign Production Contract Manufacturing – Company arranges to have its products manufactured by an independent local company on a contractual basis. Contract Manufacturing – Company arranges to have its products manufactured by an independent local company on a contractual basis. Avoids having to establish a factory in that market; can help to overcome import barriers Avoids having to establish a factory in that market; can help to overcome import barriers Typically chosen for countries with low volume potential  smaller Central American, African, and Asian countries Typically chosen for countries with low volume potential  smaller Central American, African, and Asian countries Appropriate only when production technology know-how is available in the market Appropriate only when production technology know-how is available in the market

13. Copyright © Houghton Mifflin Company. All rights reserved. 9-13 Foreign Production Other Options Other Options Assembly – Company locates a proportion of manufacturing process—typically last stages—to the foreign country Assembly – Company locates a proportion of manufacturing process—typically last stages—to the foreign country E.g Nissan Pathfinder E.g Nissan Pathfinder Full-Scale Integrated Production – Company locates a fully integrated production unit in the foreign country Full-Scale Integrated Production – Company locates a fully integrated production unit in the foreign country

14. Copyright © Houghton Mifflin Company. All rights reserved. 9-14 Ownership Strategies Wholly Owned Subsidiaries – Operations fully owned by a foreign parent firm. May involve marketing, assembly, or full-scale integrated production operations Wholly Owned Subsidiaries – Operations fully owned by a foreign parent firm. May involve marketing, assembly, or full-scale integrated production operations + Profit, greater control, able to leverage experience curve effects + More easily integrated into firm’s global network - Requires substantial expertise, management time, and financial resources

15. Copyright © Houghton Mifflin Company. All rights reserved. 9-15 Ownership Strategies Joint Ventures (JVs) – Foreign company invites an outside partner to share stock ownership in a new unit. Joint Ventures (JVs) – Foreign company invites an outside partner to share stock ownership in a new unit. Equity participation may vary Equity participation may vary Can be successful if partners share the same goals and if one partner accepts primary responsibility for operational matters. Can be successful if partners share the same goals and if one partner accepts primary responsibility for operational matters.

16. Copyright © Houghton Mifflin Company. All rights reserved. 9-16 Reasons to Choose JV for Foreign Market Entry 1. JV may be required by local government 2. Partner may have important skills or contacts of value May provide local manufacturing or excellent government or distribution contacts May provide local manufacturing or excellent government or distribution contacts 3. Partner may be an important customer willing to contract for a portion of new unit’s output in return for equity participation

17. Copyright © Houghton Mifflin Company. All rights reserved. 9-17 Table 9.1 What Motivates Mexican Firms to Seek U.S. Partners?

18. Copyright © Houghton Mifflin Company. All rights reserved. 9-18 Joint Venture Divorce Regulations that force firms to partner may be rescinded Regulations that force firms to partner may be rescinded Partner may turn out to be less than ideal Partner may turn out to be less than ideal Partners may disagree about strategic direction Partners may disagree about strategic direction

19. Copyright © Houghton Mifflin Company. All rights reserved. 9-19 Flying Solo Overseas Companies increasingly are entering markets with wholly owned subsidiaries and are buying out their foreign affiliates Companies increasingly are entering markets with wholly owned subsidiaries and are buying out their foreign affiliates MNCs want to move production to high- demand countries; JV partners want to keep home factories at maximum capacity MNCs want to move production to high- demand countries; JV partners want to keep home factories at maximum capacity MNCs want affiliates to offer discounts to other subsidiaries; JV partners want to maximize profits at home MNCs want affiliates to offer discounts to other subsidiaries; JV partners want to maximize profits at home

20. Copyright © Houghton Mifflin Company. All rights reserved. 9-20 Entering Markets Via Acquisitions Opening of financial markets has made acquisition of publicly traded firms much easier During 1990s cross-border mergers and acquisitions increased fivefold!

21. Copyright © Houghton Mifflin Company. All rights reserved. 9-21 Pros and Cons of Acquisitions + Eliminates need to build manufacturing/ distribution capabilities from scratch + Established brands provide immediate market share + Attractive strategy when market dominated by established brands and saturated with competitors + Government might allow entry only via acquisitions to protect depressed industry from entrants - Attractive firms may not be available for purchase - Attractive firms may only be available at inflated prices