Strategies for Analyzing and Entering Foreign Markets Griffin & Pustay 12-1 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Business, 6th Edition chapter 12 Chapter Objectives • Discuss how firms analyze foreign markets • Outline the process by which firms choose their mode of entry into a foreign market • Describe forms of exporting and the types of intermediaries available to assist firms in exporting their goods 12-2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives (continued) • Identify the basic issues in international licensing and discuss the advantages and disadvantages of licensing • Identify the basic issues in international franchising and discuss the advantages and disadvantages of franchising 12-3 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives (concluded) • Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business • Characterize the greenfield and acquisition forms of FDI 12-4 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Foreign Market Analysis • Assess alternative markets • Evaluate the respective costs, benefits, and risks of entering each • Select those that hold the most potential for entry or expansion 12-5 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 12.1 Critical Factors in Assessing New Market Opportunities • Product-market dimensions • Potential target markets • Major product-market differences • Relevant trends • Structural characteristics of national market • Competitor analysis 12-6 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Explanation of change • Success factors • Strategic options Map 12.1 A Tale of Two Chinas 12-7 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 12.1 Choosing a Mode of Entry 12-8 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Exporting Advantages Disadvantages • Relatively low financial exposure • Vulnerability to tariffs and NTBs • Permit gradual market entry • Logistical complexities • Acquire knowledge about local market • Potential conflicts with distributors • Avoid restrictions on foreign investment 12-9 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Motivations for Exporting Proactive 12-10 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Reactive Basic Issues in International Licensing • Set the boundaries of the agreement • Establish compensation rates • Agree on the rights, privileges, and constraints conveyed in the agreement • Specify the duration of the agreement 12-23 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Licensing Advantages Disadvantages • Low financial risks • Limited market opportunities/profits • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Licensee provides knowledge of local markets 12-24 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Dependence on licensee • Potential conflicts with licensee • Possibility of creating future competitor Franchising A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee 12-25 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Basic Issues in International Franchising • Does a differential advantage exist in the domestic market? • Are these success factors transferable to foreign locations? • Has franchising been a successful domestic strategy? 12-26 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Yum! Brands Franchise Opportunities 12-27 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Franchising Advantages Disadvantages • Low financial risks • Limited market opportunities/profits • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Maintain more control than with licensing • Franchisee provides knowledge of local market 12-28 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Dependence on franchisee • Potential conflicts with franchisee • Possibility of creating future competitor Specialized Entry Modes for International Business Contract Manufacturing Management Contract Turnkey Project 12-29 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Contract Manufacturing Advantages Disadvantages • Low financial risks • Reduced control (may affect quality, delivery schedules, etc.) • Minimize resources devoted to manufacturing • Focus firm’s resources on other elements of the value chain 12-30 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Reduce learning potential • Potential public relations problems Management Contracts 12-31 Advantages Disadvantages • Focus firm’s resources on its area of expertise • Potential returns limited by contract expertise • Minimal financial exposure • May unintentionally transfer proprietary knowledge and techniques to contractee Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Turnkey Projects Advantages Disadvantages • Focus firm’s resources on its area of expertise • Financial risks • Avoid all long-term operational risks – Cost overruns • Construction risks – Delays – Problems with suppliers 12-32 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Foreign Direct Investment Advantages Disadvantages • High profit potential • High financial and managerial investments • Maintain control over operations • Acquire knowledge of local market • Avoid tariffs and NTBs 12-33 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Higher exposure to political risk • Vulnerability to restrictions on foreign investment • Greater managerial complexity Foreign Direct Investment (continued) • Building new facilities (the greenfield strategy) • Buying existing assets in a foreign country (acquisition strategy) • Participating in a joint venture 12-34 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Greenfield Strategy • Best site • Modern facilities • Economic development incentives • Clean slate 12-35 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Acquisition Strategy A second FDI Strategy is the acquisition of an existing firm conducting business in the host country 12-36 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall ... Indirect exporting Direct exporting 12- 11 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Intracorporate transfers Figure 12. 2a Indirect Exporting 12- 12 Copyright 2010 Pearson Education,... publishing as Prentice Hall Figure 12. 2b Direct Exporting 12- 13 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 12. 2c Intracorporate Transfers 12- 14 Copyright 2010 Pearson... Competitor analysis 12- 6 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Explanation of change • Success factors • Strategic options Map 12. 1 A Tale of Two Chinas 12- 7 Copyright