Chapter 12 - The firm’s market-entry strategies. The main goals of this chapter are to: Examine the main market and entry options for a company starting in international business, identify the main categories of companies involved in international trade, discuss an outline of foreign business plans (export marketing plan and FDI plan),...
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Chapter 12 The firm’s market-entry strategies
EXPORTING
?
FRANCHISING?
TURNKEY?
LICENSING ?
DIRECT INVESTMENT ?
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Lecture plan
• The firm’s foreign business strategy
• Exporting
• Contracting (licensing, leasing etc)
• Joint ventures
• Wholly-owned company
• Advantages and disadvantages of various market entries
• Strategic FDI plan issues
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Export-import management
Company business strategies
• Domestic strategies
– investment in product development
– expand domestic market share
– diversify into new industry.
• Foreign business strategies
– exporting
– international contracting
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The firm’s foreign business strategy
1 JV = Joint Venture
2 WOC = Wholly-Owned Company Source: adapted from R Grosse & D Kujawa,
International Business, Irwin, 1992
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Exporting
• World exports of goods ($US8880 billion in
2004) have declined in relative importance
compared to foreign production ($US17,580
billion in 2003).
• Most likely mode for serving a foreign market for
a domestic firm starting in international business.
– the business plan (export marketing plan) – many global companies combine exports and FDI
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Exports: advantages
• Least costly and risky
– L/C payment
• Specialisation, economies of scale.
• Open to any size or kind of firm
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Exports: disadvantages
• Production costs in the home country may
be higher.
• Transport costs may make exporting
uneconomical.
• Trade barriers in target markets
• Divided loyalties of O/S agents
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Types of international exporters
• Casual exporter
– domestic firms that do not do
international business on a regular basis (< 5% of T/O)
• Small-scale exporter
– 5–20% of turnover
• Experienced/global exporter
– high ratio of its turnover through
involvement in worldwide business deals (exports + FDI)
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Licensing
• Licensor grants rights to intangible property to a
Licensee in exchange for a royalty payment.
• Time and territorial limits
• Advantages:
– speed of execution
– low risk/investment cost
– brand recognition
– preliminary cooperation which may be expanded into FDI
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Licensing: disadvantages
• Isolation from the market
• Lack of managerial control
• Limited life
• Risk of technology loss
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Franchising
• A franchisor sells limited brand use rights,
products and services to a franchisee in return for
a lump sum payment and a share of the
franchisee’s profits.
• 20% of US franchise systems have foreign
operations (Japan, Canada, UK, Australia)
- Domino’s Pizza vs Pizza Haven (200 in 7 years);
- Dunkin’ Donuts vs Donut King
• Low market entry costs and risks
• Quality control is difficult due to big number of
franchisees and geographic location.
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Subcontracting
• Supply arrangement between a principal and a
subcontractor
• Advantages
– low investment cost
– speed
– stable processing cost and quality
– control of sales and marketing
– can become the basis for later alliance
• Disadvantages
– risk of non-delivery or late delivery
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Turnkey operations
• Contract for the
construction of
operating facilities
that are transferred
for a fee to the owner
after commissioning
• Advantages
• high economic returns
• less risky than FDI
• Disadvantages
• lack of long-term market presence
• loss of control over technology
• client may turn into a competitor
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Joint ventures
• A legal entity jointly owned by two or more legally distinct organisations which share in the JV’s decision-making activities
• Various options
– 2 companies from the same country
– foreign/local
– 2 or more companies setting up a JV in
a third country
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Joint ventures cont.
• Advantages
– partner’s local knowledge
– cost/risk sharing
– host government legislation
– low risk of nationalisation
• Disadvantages
– technology control risk
– less control over subsidiaries
– management control conflicts
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Wholly-owned subsidiaries
• A firm owns 100% of the stock
• Trend in the motor-car sector (e.g India, China)
• Advantages
• Disadvantages
‘Greenfield’ operations)
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China: joint ventures vs wholly
owned
0 5 10 15 20 25
US$ Bln
Source: adapted from UNCTAD, World Investment Report 1999
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Strategic FDI plan issues
• Investment location evaluation
– see matrix on next slide
• Strategic organisation
– international group
– business/product units
– functional units
– global matrix
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Investment location evaluation
Weight Country
A Country B 1 x 2 1 x 3
Source: Fig 12.3, p.298
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Strategic FDI plan issues
• Financial management and control
– investment decisions
– financing decisions
– global money management
• Global sourcing strategy
– outsourcing
• Global human resource strategies