978-0077606121 Chapter 13 Lecture

Type

Quiz

Book Title

International Business: The Challenge of Global Competition 13th Edition

ISBN 13

978-0077606121

April 7, 2019

CHAPTER 13

1 Entry Modes

2 Learning Objectives

3LO 13-1 Explain the pros and cons of entering markets as a “market pioneer” versus being a “fast

follower.”

4LO 13-2 Explain the international market entry methods.

5LO 13-3 Identify why firms export and the options available for indirect and direct exporting.

6LO 13-4 Explain the potential benefits and disadvantages of joint ventures and how a company

might exercise control over a joint venture, even as a minority shareholder.

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies can

change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the

International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,

videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to

the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video

service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop

to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and

discussion questions. Key concepts for each video are identified to save you time! Visit

www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about

iGlobe or the IB Newsletter.

8 Overview

This chapter explores market entry methods available to management when considering international

business. The reasons a firm goes abroad are linked to the desire to increase profit and sales or for other

competitive reasons, such as to attack a competitor in the competitor’s home market or to protect existing

markets. Some companies begin their foreign entry by first exporting, then setting up foreign sales

companies and finally, when sales volume warrants, establishing foreign manufacturing. This incremental

approach is proactive yet cautious, requiring additional resources as the firm increases its level of

commitment.

The chapter opens with a discussion on how early entrants are not guaranteed success. A market pioneer

firm stands the best chance for long-term success in market-share leadership and profitability when: (1)

the new market is insulated due to high entry barriers and (2) the firm has sufficient size, resources and

competencies to take full advantage of its pioneering position. Fast followers that have larger resources

than pioneers can quickly reduce unit costs to offer lower prices.

There are times when a business may bypass exporting and become involved in foreign manufacturing.

When a business uses this approach, the alternatives available are establishing a wholly owned subsidiary,

joint ventures and strategic alliances.

9 Suggestions and Comments

1. This chapter is quite straightforward and descriptive.

2. Robert F. Hartley’s Marketing Mistakes and Successes and David Ricks’ Blunders in International

Business provide examples of marketing errors when firms have attempted to enter markets in the

international forum.

10 Student Involvement Exercises

1. If you have foreign students you can ask them to comment the ways a specific foreign product

entered their respective markets.

2. Franchising is a popular market entry mode for American chains. Ask students to compare foreign

franchised operations they may have visited with U.S. operations and comment on any observed

localization.

Guest Lecturers

1. A member of a multinational marketing team can provide some insight as to what mode the firm

decides to use when it enters new markets.

2. A member of the headquarters marketing staff can discuss the company policy with respect to

market entry.

Worldview

The focus of this Worldview explores “Joint Venture Challenges: Danone and Wahaha in China.”

The French multinational Group Danone SA entered China in the 1990s via a joint venture with the local

company Wahaha. Danone remained the majority owner in the relationship, which ultimately expanded to

a network of 39 different joint ventures between these two partners, but Danone had limited involvement

in day-to-day activities of the ventures. The ventures grew impressively, generating annual revenues of $2

billion after the initial 10 years of existence. Yet this partnership also evidenced challenges that ultimately

created a very negative relationship between the partners, created a very public level of acrimony, and

impacted Danone’s efforts to compete in the large and growing Chinese market. This excellent example of

some of the challenges of forming and running successful international joint ventures provides a very

valuable foundation for classroom discussion. A vigorous discussion can ensue by asking questions such

as, “Why do you think the problems arose between Danone and Zong?,” “What are the implications of the

actions that each partner took after their agreement collapsed in 2007? What could the companies have

done to better manage their disagreements,” and “What might Danone have done to either avoid or reduce

the problems that occurred over the live of the JVs?”

Global Debate

The focus of this Global Debate explores the use of piracy as a means of entering foreign markets. While

piracy is usually viewed as something that companies will vigorously oppose in order to protect their

intellectual property, this Global Debate discusses how piracy can also positively impact the global

expansion of demand for a product, focusing specifically on the example of Japanese anime and

supplementing this discussion with examples of computer software and movies. The discussion suggests

that piracy may help to diffuse new products or technologies. Because this perspective of piracy as an

enabler of foreign market entry is a sharp contrast from typical discussions of piracy, an interesting

classroom debate can be facilitated by beginning with such questions as, “How can piracy help a

company to successfully, and profitably, enter foreign markets?” and “Consider the case of a small or

medium-sized company that was producing software or applications for use on cell phones. If you were

asked by this company to assist them in developing a strategy for using piracy as a means of entering

foreign markets, what advice would you give them regarding how to successfully develop and implement

such a strategy?” Further discussion may result from exploring the circumstances in which piracy would

inhibit, rather than help promote, the entry of products into foreign markets.

The Global Path Ahead

The focus of this The Global Path Ahead explores a student’s decision to pursue an active, international

career while still residing in a small rural town. It discusses Mark Haupt’s decision to maintain his home

base in the rural community that he had grown to love, yet to identify and exploit opportunities for

international travel and for extensive interaction with a network of international customers. The

discussion examines the approach that he has used to help enhance his international success, including

how he prepares in advance through research, how he alters his work hours in order to overlap with those

of his foreign clients, and how he addresses problems that have arisen. He provides several valuable

insights regarding how students might proceed in their own efforts to develop international opportunities

early in their careers. The Resources for Your Global Career section provides a range of useful suggested

websites for improving managers’ efforts to make good decisions regarding whether and how to enter

foreign markets.

13 Mini-Case, “Method of Entry – The Foley Company”

Although students will have various ideas regarding the options available to the Foley Company for

entering into Brazil, as well as the advantages and disadvantages of each, there is likely to be a larger

range of responses when it comes to recommendations on which option would be best (and why) and the

information that would be needed in order to proceed with market entry. Here is a listing of Joanne Poe’s

options, along with advantages and disadvantages of each.

I. Foley Company

A. Wholly owned subsidiary

1. Start from ground up and build factory

2. Buy a company making products, which use about the same processes. Such a

plant could be converted albeit with a cost.

3. Purchase the distributor and expand facilities. The distributor already repairs

the combines so they must have a sizable machine shop and they certainly have

the marketing expertise

B. Form a joint venture

1. With the distributor

2. With the company making similar products

C. Licensing agreement

D. Contract manufacturing

II. Advantages and Disadvantages for each Option

A. Wholly owned subsidiary

1. Expensive (-)

2. Time Consuming (-)

3. Control (+)

4. Uncontrollable factors

i. Culture (-)

ii. Governmental (-)

iii. Legal (-)

5. Most Rewarding (+)

B. Joint Venture

1. Shared profits (-)

2. Shared risk (+)

3. Shared control (-)

4. Local partner helps smooth the way (+)

i. Politically

ii. Legally

iii. Culturally

5. Less Expense

C. Licensing Agreement

1. Easy to set up (+)

2. May be creating a competitor (-)

3. Lack of control (-)

4. May lose trade secrets (-)

D. Contract manufacturing

1. Similar to Licensing agreement in many ways

2. Control (+)

3. Must understand culture (-)

Joanne Poe would most likely recommend either purchase the Brazilian distributor or entry into a

joint venture with the distributor, since the Foley Company lacks marketing expertise in Brazil.

Before a wholly owned subsidiary is pursued, Osborne must check Brazilian laws to see if 100

percent foreign ownership is permitted (which it is) and if there are any tax incentives given to

joint ventures given to joint ventures when one partner is Brazilian.

Other questions to consider are as follows:

What is the market potential for peanut combines in Brazil? Is the crop size growing?

What are the prices, levels of quality and acceptance in Brazilian market of competing

machines?

If peanut combines were to be produced in Brazil could they be exported? If so with

what countries does Brazil maintain free trade agreements?

Does the Brazilian government offer investment incentives?

Labor market issues – wage rates, unemployment rate and worker skill level.

14 Lecture Outline

Opening Section

The opening section describes market entry in the international social media sector, and the variation that

exists between major competitors pursuing globalized and more localized strategies.

I. Entering Foreign Markets: Should You Be a Market Pioneer or a Fast Follower?

A. Little evidence concerning the effect of the timing of entry into a new market and the firm’s

ultimate profitability in that market or the value it generates for shareholders.

B. A market pioneer firm stands the best chance for long-term success in market-share

leadership and profitability when:

1. the new market is insulated due to high entry barriers such as strong patent

protection, proprietary technology, or substantial investment requirements

2. the firm has sufficient size, resources and competencies to take full advantage of its

pioneering position

C. Fast followers can be successful when:

1. There are low entry barriers and the follower has sufficient resources or

competencies to overwhelm the pioneer’s early advantage

II. What Methods Are Available for Entering Foreign Markets?

There is a choice between equity or non-equity alternative entry modes.

A. Nonequity Modes of Entry – direct or indirect exporting

1. Exporting

a. Most firms begin their international involvement through exporting

b. Requires little investment

c. Relatively free of risks

d. Excellent means of getting a feel for international business without committing

great amounts of resources

2. Benefits of Exporting

a. allows firm to serve markets where it has no or limited production facilities

b. satisfies host government requirements that a local subsidiary has exports

c. helps to remain price competitive in home markets through lower cost foreign

sites

d. can test foreign markets and foreign competition inexpensively

e. can meet actual or prospective customer requests for the firm to export

f. can offset cyclical sales in the domestic market

g. can achieve additional sales, use excess production capacity, and lower per-unit

fixed costs

h. can extend a product’s life cycle to exporting to currently unserved markets at

earlier stages of the life cycle

i. can respond strategically to foreign competitors that are in a firm’s home market

by entering the foreign competitor’s home market

j. can achieve the success that other firms have achieved through exports

k. can improve efficiency of manufacturing equipment utilization

3. Indirect Exporting

a. Indirect exporting is simpler than direct exporting because it requires neither

special expertise nor large capital expenditures.

b.Exporters that sell for the manufacturer ’ agents based in the country receiving

the goods will do the work of selling or distribution of the goods. Exporters’

agents are called many things.

i. Exporters that sell for the manufacturer – including manufacturers’

export agents, export management companies (EMCs), and

international trading companies.

ii. Exporters who buy for their overseas customers – export commission

agents.

iii. Exporters who purchase and sell for their own accounts – including

export merchants, cooperative exporters (also called piggyback

exporters), and Webb-Pomerene Associations

iv. Exporters that purchase for foreign users and middlemen – including

large foreign firms which use the goods in their overseas operations,

and export resident buyers.

c. Drawbacks of indirect exporting – a simple method as compared to direct

exporting but that simplicity comes at a price.

I. Indirect exporters pay a commission to the first three kinds of

exporters mentioned earlier.

II. Foreign business can be lost if exporters agents decide to change their

sources of supply.

III. Indirect exporters gain little experience from these transactions. It is

important to note that the indirect export loses some control over the

marketing mix when the international manager employs the services

of an exporting agent.

4. Direct Exporting

a. To engage in direct exporting, someone within the firm handles the export

business.

b. Its simplest form is to give someone in the business the responsibility for

exporting. Domestic employees may handle billing, credit, and shipping initially,

and if business expands, a separate export department may be established.

c. If a firm that has been exporting to wholesaler importers in an area and servicing

them from the home country, business managers may decide to set up a sales

company once business will support this arrangement.

i. Sales company is an arrangement in which a company will import in its

own name from the parent and will invoice in the local currency.

ii. A sales company may employ the same channels of distribution but the

new organization may permit the use of a more profitable arrangement.

iii. Internet has made direct exporting much easier.

5. Distribution options for direct exporters

a. If a firm chooses to do its own exporting but not directly handle distribution in

the market it is exporting to, it has four basic options for overseas middlemen

I. Manufacturers agents – independent sales representatives that combine

functions of agent and wholesale distributor but do not assume financial

responsibility for the imported product

II. Distributors (wholesale importers) – independent importers that buy for

their own account for resale

III. Retailers – frequently act as direct importers, especially for consumer

products

IV. Trading companies – firms that develop international trade and serve as

intermediaries between foreign buyers and domestic sellers

6. Turnkey Projects

a. Involve exporting technology, management expertise, or capital equipment.

b. Contractor designs and builds plant and supplies process technology, raw

materials, and trained personnel.

c. After trial run, facility ownership goes to purchaser.

d. Another turnkey project supplier is a manufacturer of a factory.

7. Licensing

a. Licensing is an agreement in which the licensor grants the licensee the right to

use any kind of expertise, such as manufacturing processes, marketing

procedures, and trademarks for one or more of the licensor’s products.

b. For a fixed sum and annual 2%-5% percentage of sales (royalty).

8. Franchising is a form of licensing.

a. This arrangement allows the franchisee to sell products or services under a highly

publicized brand name and a well-proven set of procedures with a carefully

developed and controllable marketing strategy.

b. This arrangement is most common in service industries.

9. Management Contract:

a. Arrangement under which company provides managerial know how to another

party in some or all functional areas.

b. Fee is 2-5% of sales.

10. Contract Manufacturing

a. Contract manufacturing can be used as a means of entering a foreign market

without investment in plant facilities.

i. Firm contracts with a local manufacturer to produce products for it

according to specifications.

ii. The firm’s organization markets the products under their own brand.

iii. Second method is to subcontract assembly work or the production of

parts to independent companies overseas.

B. Equity-Based Modes of Entry

When management does decide to make a direct investment in a foreign country they have

several options.

Wholly owned subsidiary

Joint Venture

Strategic Alliances

When management is determined to make a direct investment, each option above has certain

advantages and disadvantages.

1. Wholly Owned Subsidiary

a. When a company wishes to make a direct foreign investment, they may undertake

any of the following strategies.

i. Build new plant from ground up (Greenfield investment)

ii. Acquire a going concern

iii. Purchase its distributor

b. Wholly owned subsidiaries are preferred method of investment since they allow the

business ultimate control over the product.

c. It is interesting to note that when international firms invest in the United States they

have historically preferred to acquire a going concern. This gives the business instant

access to the market rather than going through the long and sometimes complex

process of building a wholly owned subsidiary from the ground up.

d. In some cases, government may not allow creation or acquisition of a wholly owned

subsidiary.

2. Joint Venture

a. A cooperative effort among two or more organizations that share common interest in

a business enterprise or undertaking.

b. A joint venture may be:

i. a corporate entity formed by an international company and local owners

ii. a corporate entity formed by two international companies for the purpose of doing business in a

third market

iii. a corporate entity formed by a government agency and an international firm, or

iv. a cooperative undertaking of a limited duration between two or more firms.

3. Benefits of Joint Ventures

i. Reduced risk and competition or increased scale economies

ii. Conform with government regulations for local participation

iii. Strong Nationalism – nationalistic sentiment may cause the foreign firm

to enter into a joint venture with a local partner in an effort to blend into

the local market.

iv. Expertise, tax, and other benefits – Businesses may enter a joint venture

for other reasons: acquire expertise that is lacking, access special tax

benefits, reduce investment risk, or meet need for additional capital and

experienced personnel.

4. A Disadvantage of joint ventures: Loss of Control – Joint ventures present many

advantages but have many disadvantages.

i. One disadvantage is sharing of profit.

ii. Can limit ability to achieve efficient allocation of investments and

production and to maintain a coordinated marketing plan worldwide

iii. Some international businesses fear their joint venture partner (or the joint

venture) may become a competitor in the future.

5. Control of joint venture though management contracts – Local laws may require local

majority ownership in an effort to give control of the joint venture to their own citizens.

6. Other Options for Exercising Control in Joint Ventures – Control with a minority

ownership may be feasible.

i. Supermajority voting requirements

ii. Maintaining the right to appoint or approve key managerial positions

iii. Splitting control of the venture so each partner may have primary

influence over certain key activities

iv. Control over or participation in the design and implementation of

performance appraisal and reward systems for top management and other

joint venture personnel.

7. Strategic Alliance

a. Faced with both expanding global competition and growing cost of research, product

development, and marketing, and the need to move faster in carrying out their global

strategies, many firms are forming strategic alliances.

b. The goal of a strategic alliance is to achieve faster market entry and start-up; gain

access to new products, technologies, and markets; and share costs, resources, and

risks.

i. Companies wanting to share technologies may cross-license their

technology.

ii. If the goal is to pool research and design resources, they may form an

R&D partnership.

c. Alliances May Be Joint Ventures.

d. Pooling versus Trading Alliances – Differences between a trading alliance and a

pooling alliance. Pooling alliance is driven by similarity and integration, while

trading alliances are driven by the logic of contributing dissimilar resources.

e. Alliances versus Mergers and Acquisitions – Typically mergers and acquisitions are

not considered alliances, although alliances, mergers and acquisitions may be ways

for firms to acquire new technology

f. Future of Alliances – Many alliances fail or are taken over by one of the partners.