1. Global Market Entry Strategies
Chapter Nine
Global Market Entry Strategies

2. Foreign Market Entry Modes Full-scale Integrated Production
Exporting
Foreign Production
Indirect
Direct
Assembly
Full-scale Integrated Production
Distributor Alliance
Marketing
Subsidiary
Ownership Strategies
Contract Manuf.
Licensing/Franch.
Joint Venture
Strategic Alliance
Wholly Owned Sub
This is a nice overview slide that displays the entry-mode decision-making landscape for the student.

3. Two Methods of Exporting
Indirect - Reaching markets with the use of an intermediary located in the exporter’s home country
Leverage intermediary’s expertise
Good for firms with little international experience
Less profit, less control, do not gain experience curve effects

4. Intermediaries for Indirect Exporting
Export Management Company (EMC)
Handles all aspects of export operations
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)

5. Intermediaries for Indirect Exporting (cont’d)
Export Agents
Individuals or firms that assist manufacturers in exporting goods
Similar to EMCs; but tend to provide more limited services and focus on one country or part of the world
Focus more on sale and handling of goods
Exporting firms may need to utilize several export agents to gain adequate worldwide market coverage

6. Two Methods of Exporting
Direct – Reaching markets either yourself or with the use of an intermediary located in the foreign market
More profit, greater control, able to leverage experience curve effects
Requires more expertise, management time, and financial resources

7. Some Examples of Direct Exporting Activities
Identifying market opportunity
Product, price, place, promotion
Ensuring payment
Distributing the product
Shipping the product
Insurance, freight forwarding
Clearing customs
Getting it into the hands of buyers
Warehousing, transporting to retail, etc.
Providing after-sales support
Lots to Do!
No wonder many
firms choose
an intermediary
to do this for them
Direct exporters take on a lot of responsibility that require local market knowledge, connections, and know-how. Direct exporters must understand what the market opportunity is (which buyers demand what type of products/services, in what type of packaging, at what price point, provided in what location, communicated to them in what way etc.). If selling to an agent, distributor, or end-user abroad, direct exporters must also make sure that they get paid (check creditworthiness, open up letters of credit, hedging against currency losses, etc.). The product must be freight forwarded to the border of the foreign country, and insurance should be provided to insure against lost during transport. The product must clear customs (filling out required paperwork, valuation, paying tariff, etc.). Then it must be warehoused and/or transported into the hands of the buyers. If an exporter hires a distributor in a foreign market, the process of screening, choosing, contracting and working with a local distributor needs to be done. In many cases, exporters need to maintain after-sales support, providing parts and supplies and/or other customer service to buyers after the purchase.
This is A LOT; therefore many small exporters and novice exporters choose an export intermediary to do this work for them.

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

9. Cooperating for Export
Companies competing against each other in their domestic market may unite to address export markets as export consortiums
Governments may encourage and support cooperation
Brazil’s Ministry of Development, Industry, and Foreign Trade create export consortiums to share logistical and promotion costs of entering foreign markets

10. Foreign Production Firms may shift production to foreign markets
Gain market position
Circumvent import restrictions (quotas and tarriffs),
Communicates commitment to market
Defend market position
Response to protectionism, currency fluctuations
Follow the customer
Lower Costs
Cheaper production factors, decrease transportation costs, etc.

11. Types of Foreign Production
Licensing – Company assigns the right to a copyright, patent and/or trademark to another company for a fee or royalty (% sales volume)

12. Pros and Cons of Licensing
Leverage local knowledge of licensee
Commercial and political risks absorbed by licensee
Better for marketing adaptation strategies
Can improve firm’s manufacturing capacity
Enables firms to enter several markets quickly
Possibility of creating a future competitor
Dependence on licensee
Uncertainty of licensee’s marketing and quality control capabilities
Potential dilution of brand equity

13. Foreign Production
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
U.S. is home to the greatest number of franchisers
Growth rates for franchising are higher in non-U.S. markets
Master franchises – exclusive rights to a whole city or country

14. McDonalds: The Big Mac of Franchising
30,000+ locations; 119 countries
70% franchises, 30% company owned
New franchise cost - $500,000
At least $100,000 cash
McDonalds gets
Initial fee
% sales volume
McDonalds supplies:
Pre-planning market and location research
Operations and standards training
Management training
Information taken from and
Some fun facts about McDonald’s franchisees:
First Franchised McDonald's Restaurant Des Plaines, IL 1955
First McDonald's Franchisee Art Bender 1955
First International McDonald's British Columbia, Canada 1967
First Twin Grand Opening Two Restaurants in Cairo, Egypt 1994
McDonald's International Division Created 1969
Seven of the world's busiest McDonald's are located in Hong Kong
McDonald's franchisees developed 3 of our famous sandwiches. Big Mac, Jim Delligatti Filet-O-Fish, Lou Groen Egg McMuffin, Herb Peterson

15. Foreign Production
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
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

16. Foreign Production Other Options
Final-Stage Assembly – Company locates a proportion of manufacturing process—typically last stages— in the foreign country
Manufacturing and Inter-firm Licensing – If taxes on royalties are less than taxes on repatriated profits, a firm may license its trademark or technology to its manufacturing subsidiary

17. Ownership Strategies
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 and economies of scale
More easily integrated into firm’s global network
Requires substantial expertise, management time, and financial resources

18. Ownership Strategies
Joint Ventures (JVs) – Foreign company invites an outside partner to share equity ownership in a new unit.
Equity participation shares may not be equal and vary by deal
Can be successful if partners share the same goals and if one partner accepts primary responsibility for operational matters.

19. Reasons to Choose JV for Foreign Market Entry
JV may be required by local government
Each partner usually has complementary skills or contacts of value (i.e. distribution network)
Good for high-risk endeavors
Easier “partnership” dissolution process

20. Why do Mexican Firms Seek U.S. Partners?
Insert Table 9.1, p. 282

21. Joint Venture Divorce 25% - 75% JVs Divorce
Regulations that force firms to partner may be rescinded
Partner may turn out to be less than ideal
Partners may disagree about strategic direction

22. Partner Selection
Get as much information as possible on partner – BEFORE COMMITTING!
Collect data from informed third parties:
Former partners
Investment bankers
Industry analysts
Former employees
Spend time and get to know the partner
Pilot projects
Before selecting a joint venture partner, make sure to get as much information as possible before committing! It is a good idea to collect intelligence from “informed third parties,” such as former partners, investment bankers, industry analysts, and former employees, wherever possible. Spend time with the partner and get to know each other before committing to a long-term relationship. In some cases, pilot projects, which are short term, may help identify potential problem areas for a full joint-venture relationship.

23. Partner Selection (cont’d)
Always wise to have a “prenuptial agreement”
1999 AT&T and British Telecom forge JV called Concert
Deliberately did not sign a pre-nuptial agreement so that both partners would remain committed to the relationship
2 years later, venture was losing $210 million a quarter
Without agreement, there was no simple, agreeable way to divide Concert’s assets!!!

24. Strategic Alliances
Strategic Alliances – an alliance involving two or more global firms in which each partner brings a particular skill or resource to relationship.
Technology-based
Production-based
Distribution-based
Usually NOT an equity sharing arrangement

25. 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!

26. 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
Culture clashes (even worse when acquired by a foreigner!)
Country’s animosity toward foreign ownership of previously domestic firm

27. Risk Versus Ownership and Control
High
Wholly Owned Subsidiary
Joint Venture
Extent of Investment and Risk
Strategic Alliance
Franchising
Licensing
There is a trade-off between the degree of ownership and control (low to high) and the extent of investment and risk required (low to high) for each entry mode.
Exporting
Low
Low
High
Degree of Ownership and Control

28. Traditional Internationalization Stages
Domestic
Sales
STAGE 1
Indirect
Exporting,
Licensing or
Franchising
STAGE 2
Direct
Exporting
STAGE 3
Direct Exp,.with
Foreign Sales
Subsidiary
STAGE 5
Full-Scale
Foreign
Production
But born
globals are
on the rise!
STAGE 4
Local Assembly
Traditional “stage theory” states that firms typically begin to internationalize through indirect exporting, licensing, or franchising, modes that require less investment and involve less risk but that do not enable a high level of control. Next, firms tend to move to direct exporting, first using a distributor then via a foreign sales subsidiary. This requires a greater amount of investment and involves a greater amount of risk. But it also enables the firm to have more control. In later stages, firms tend to get involved with local assembly and full-scale foreign production. This is the typical internationalization path. But it is certainly not the only path! For example, born globals (e.g., firms that are international from the beginning of their operations) are on the rise. Also, some firms skip steps (e.g., go from licensing to full-scale foreign production).