International bussiness the challenge of global competition 11e chapter 16

chapter sixteen Entry Modes McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc All rights reserved Learning Objectives  Explain the international market entry methods  Discuss the debate on whether being a market pioneer or a fast follower is most useful  Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business  Discuss channel members available to companies that export or manufacture overseas 16-3 Pioneers vs Fast Followers • Pioneers • Followers – Can gain and maintain – Many become followers by competitive edge in new default market – May be advantage to let – Overall pioneers may not pioneer take initial risks perform as well in the long • Most successful when run as followers • Most successful when – High entry barriers exist – Firm has sufficient size, resources, and competencies – Few legal, technological, cultural, or financial barriers – Sufficient resources or competencies to overwhelm the pioneer’s early advantage 16-4 Entering Foreign Markets • Nonequity modes of market entry – Exporting • Selling some regular production overseas • Requires little investment • Relatively free of risk • Indirect exporting • Direct exporting • Equity modes of market entry – Wholly owned subsidiary – Joint venture – Strategic alliance 16-5 Summary: Modes of Entry 16-6 Indirect Exporting • Exporting of goods and services through various home-based exporters – Manufacturers’ export agents • sell for manufacturer – Export commission agents • buy for overseas customers – Export merchants • purchase and sell for own accounts – International firms • use the goods overseas 16-7 Indirect Exporting, cont’d • Disadvantages – Commission to export agents, commission agents, export merchants – Foreign business can be lost if exporters decide to change their sources and supply – Firm gains little experience from transactions 16-8 Direct Exporting • Exporting of goods and services by the producing firm • Sales company option • Business established to market goods and services • Internet has made direct exporting much easier • Cost of trial low 16-9 Exporting • Turnkey Project used for export of – Technology – Management expertise – Capital equipment (some cases) • After trial run, facility is turned over to purchaser • Exporter of a turnkey project may be – Contractor that specializes in designing and erecting plants in a particular industry – Company that wishes to earn money from its expertise – Producer of a factory 16-10 Equity-Based Modes of Entry • Wholly Owned Subsidiary • Joint Venture • Strategic Alliance 16-14 Wholly Owned Subsidiary • Wholly Owned Subsidiary • build a new plant (greenfield investment) • acquire a going concern • purchase distributor, to obtain a distribution network familiar with products 16-15 Joint Venture • Joint Venture – Cooperative effort among two or more organizations that share common interest in business enterprise • corporate entity formed by international company and local owners • corporate entity formed by two international companies for the purpose of doing business in a third market • a corporate entity formed by a government 16-16 Joint Venture, cont’d • Disadvantages – Profits shared – If law allows no more than 49% foreign ownership, lose control – Control with minority ownership is possible if • Take 49% of shares and give 2% to local law firm or trusted national • Take in local majority partner (sleeping partner) • Management contract – Can enable the global partner to control many aspects of a joint venture even when holding only a minority position 16-17 Strategic Alliances • Partnerships between competitor, customers, or suppliers that may take various forms • Aims to achieve – Faster market entry and start-up – Access to new • Products • Technologies • Markets – Cost-savings by sharing • Costs • Resources • Risks 16-18 Strategic Alliances, cont’d • May be Joint Ventures • Pooling alliances driven by similarity and integration • Trading alliances driven by contribution of dissimilar resources • Alternatives to mergers and acquisitions • Future of Alliances – Many fail or are taken over by a partner – Difficult to manage • Different strategies • Different operating practices • Different organizational cultures – Allow partner to acquire technological or other competencies – Regardless, will continue to be important strategic tool 16-19 Channel of Distribution • Links producer with foreign user • Product and its title pass from producer to user 16-20 Channel of Distribution Members: Indirect Exporting – Indirect Export Channel Members • Sell for manufacturer • Buy for overseas customers • Buy and sell for own account • Purchase on behalf of foreign middlemen or users 16-21 Indirect Exporting • Exporters that sell for the manufacturer – Manufacturers’ export agent • Acts as the international representative for various noncompeting domestic manufacturers – Export management companies (EMC) • Acts as the export department for noncompeting manufacturers – International trading companies • Acts as agent for some companies and as wholesaler for others 16-22 Indirect Exporting: International Trading Companies • International Trading Companies – Japan: Sogo Shosha • Originally established by the zaibatsu, centralized, family-dominated economic groups – Korean: chaebol – Owned by Korean conglomerates • Export trading companies (ETC) – U.S firm established principally to export domestic goods and services 16-23 International Channels of Distribution 16-24 Indirect Exporting, cont’d • Exporters that buy for their overseas customers – Export commission agents • Represent overseas purchasers, such as import firms and large industrial users • Paid commission by the purchaser for acting as resident buyer 16-25 Indirect Exporting, cont’d • Exporters that buy and sell for their own account – Export merchants • Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names – Cooperative exporters/piggyback exporters • Established international manufacturers that export other manufacturers’ goods as well as their own – Webb-Pomerene Associations • Organizations of competing firms that have joined together for the sole purpose of export trade 16-26 Indirect Exporting, cont’d • Exporters that purchase for foreign users and middlemen – Large foreign users • Buy for their own use overseas – Export resident buyers • Perform essentially the same functions as export commission agents but more closely associated with a foreign firm 16-27 Direct Exporting Distribution Channel Members • Manufacturer’s agent – Independent sales representative of noncompeting suppliers • Distributor/wholesale importer – Independent importer that buys for own account for resale • Retailer – Frequently direct importer • Trading company – Firm that develops international trade and serves as intermediary between foreign buyers and domestic sellers and vice versa 16-28 ... formed by two international companies for the purpose of doing business in a third market • a corporate entity formed by a government 16- 16 Joint Venture, cont’d • Disadvantages – Profits shared... and then sell, invoice, and ship them in their own names – Cooperative exporters/piggyback exporters • Established international manufacturers that export other manufacturers’ goods as well as their... have been pressed to enforce their patent laws 16- 11 Franchising • Franchising – Form of licensing in which one firm contracts with another to operate a certain type of business under an established