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CHAPTER 12
Strategies for Analyzing and Entering
Foreign Markets
1. Discuss how firms analyze foreign markets.
2. Outline the process by which firms choose their mode of entry into a
foreign market.
4. Identify the basic issues in international licensing and discuss the
advantages and disadvantages of licensing.
6. Analyze contract manufacturing, management contracts, and turnkey
projects as specialized entry modes for international business.
7. Characterize the greenfield and acquisition forms of FDI.
LECTURE OUTLINE
OPENING CASE: The Business of Luxury
The opening case describes the history and organizational strategies of the
conglomerate Louis Vuitton Moĕt Hennessy SA (LVMH) It is controlled by a family
owned group (Arnault)). LVMH is in the business of selling prestige, focusing a collection
of luxury brands in fashion, leather goods, wines and spirits, perfumes, watches and
jewelry..
Key Points
• Bernard Anrnault was Chairman and CEO of the €20.3 billion fashion conglomerate
Louis Vuitton Moĕt Hennessy SA (LVMH)
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• Acquired firms operate as stand alone subsidiaries, as LVMH strives to reduce costs
through centralized sourcing, financing, advertising and acquisition of real estate.
• Even with the global recession, LVMH has faired well.
CHAPTER SUMMARY
Chapter 12 examines the various entry modes available to companies as they expand
internationally. The chapter begins with the choice of entry modes, and then proceeds
to discuss the advantages and disadvantages of each one.
FOREIGN MARKET ANALYSIS
To successfully increase foreign market share, firms must assess alternative markets;
evaluate the respective costs, benefits, and risks of entering each; and select those that
hold the most potential for entry or expansion.
Assessing Alternative Foreign Markets
• A firm must consider a variety of factors, including market potential, levels of
competition, the legal and political environment, and sociocultural influences when
assessing alternative foreign markets. Discuss Table 12.1 here.
• Information on some of the factors is easily obtainable from published sources in the
firm’s home country. Other information may be subjective and difficult to obtain. In
fact, it may be necessary to visit the foreign location in question.
particular market can be estimated using both objective and subjective measures.
• Levels of Competition. Firms must also consider the current and future level of
competition in foreign markets. Firms assessing their competitive environment
should identify the number and size of firms already competing in the potential
market, their relative market shares, their pricing and distribution strategies, and their
relative strengths and weaknesses. Continual monitoring can help firms identify new
• Sociocultural Influences. Sociocultural influences should also be considered when
assessing foreign market opportunities. In many cases, firms will attempt to minimize
the potential impact of sociocultural differences by initially focusing on countries that
are culturally similar to their home markets.
Evaluating Costs, Benefits, and Risks
• Costs. There are two types of relevant costs at this point: direct and opportunity.
Direct costs are incurred when entering the foreign market in question and include
costs associated with setting up a business operation, transferring managers to run
it, and shipping equipment and merchandise. A firm incurs opportunity costs when
entering one market precludes or delays its entry into another. The profits it would
have earned in the second market are opportunity costs.
• Benefits. Benefits from entering a foreign market include expected sales and profits,
lower acquisition and manufacturing costs, foreclosing of markets to competitors,
competitive advantage, access to new technology, and the opportunity to achieve
Teaching Note:
Instructors may want to begin their discussion of entry methods by
asking students how a hypothetical (or real) firm should sell its
product in other markets. Students can usually quickly name the
various choices, but are uncertain as to the pros and cons of each method.
CHOOSING A MODE OF ENTRY
• Dunning’s eclectic theory (see Chapter Six) can be helpful in providing insight as to
the best means of penetrating foreign markets. The theory considers three factors:
ownership advantages, location advantages, and internalization factors, which in
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• Ownership advantages are the tangible or intangible resources owned by a firm
that grant it a competitive advantage over industry rivals. The text provides
examples of both tangible (Vale Inco, Ltd’s nickel-bearing ore) and intangible (the
luxury appeal of LVMH Moet Hennessy Louis Vuitton’s products) ownership
advantages. The nature of a firm’s ownership advantage will play a role in the firm’s
selection of entry mode and will help it overcome the liability of foreignness.
• Location advantages are those factors that affect the desirability of host country
production relative to home country production. The choice of home country versus
EXPORTING TO FOREIGN MARKETS
• The most common international business activity is exporting, or the process of
sending goods or services from one country to other countries for use or sale there.
• Firms may have a proactive motivation for entering a foreign market, and in effect be
pulled into the market as a result of the opportunities available there. The text
provides several examples of firms that have exported as a result of a proactive
motivation. For instance, in 2011 Constellation Brands, the world’s largest wine
distributor chose to develop its own marketing and distribution channels to take
advantage of the 20% annual growth rate in the Chinese consumption of wine.
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• Indirect exporting occurs when a firm sells its products to a domestic customer,
who in turn exports the product, in either its original form or a modified form.
Because indirect exporting is usually not done on a conscious basis, the process
EMERGING OPPORTUNITIES
The Bottom of the Pyramid
This box discusses two opposing views of the growth potential offered to businesses
to enter and do business with the low income population segments in man of the
Emerging Markets. C.K. Prahadam argues that the potential is large, and the the key
• An intracorporate transfer is the selling of goods by a firm in one country to an
affiliated firm in another. Intracorporate transfer has become more important as the
sizes of MNCs have increased, and today represents some 40 percent of all U.S.
Additional Considerations PP 12-15
In addition to considering which form of exporting to use, a firm must also assess
government policies, marketing considerations, logistical considerations, and distribution
issues.
• Government policies such as export promotion policies, export financing programs,
and other forms of home country subsidization encourage exporting. However, tariff
and nontariff barriers may discourage firms from selecting exporting as an entry
mode. The text illustrates this concept with the example of how voluntary export
restraints on Japanese automobile exports encourage Japanese producers to
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Export Intermediaries
A firm may market and distribute its goods via an intermediary, a third party specializing
in the facilitation of exports and imports. There are several types of export
intermediaries including export management companies, Webb-Pomerene associations,
and international trading companies.
• An export management company (EMC) is a firm that acts as its client’s export
department. Several thousand EMCs operate in the U.S., providing clients with
information about the legal, financial, and logistical details of exporting. Some EMCs
act as commission agents, while others take title to the good.
• An international trading company is a firm directly engaged in trading a wide
variety of goods for its own account. Unlike an EMC, an international trading
company participates in both exporting and importing. Japan’s sogo sosha are the
most important trading companies in the world. The success of the sogo soshas is a
result of several factors. First, they are able to continuously obtain information about
economic conditions and business opportunities anywhere in the world. Second,
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INTERNATIONAL LICENSING
• Licensing is an arrangement whereby a firm, the licensor, sells the rights to use its
intellectual property to another firm, the licensee, in return for a fee. Firms operating
in countries with weak intellectual property protection are not advised to use
The actual licensing agreement is a critical part of the licensing process, and reflects the
bargaining power and skills of the licensor and licensee. The contract should consider
the boundaries of the agreement; compensation, rights, privileges, and constraints;
dispute resolution; and duration of the contract.
• Specifying the Agreement’s Boundaries. The first step in negotiating a licensing
contract is specifying the boundaries of the agreement. The text provides an
example of how Pepsi sets the boundaries in its licensing agreement with Heineken.
• Establishing Rights, Privileges, and Constraints. A licensing contract should spell
out the rights and privileges of the licensee and the constraints the licensor may
impose. Typically, licensees are prohibited from divulging information learned from
the licensor to third parties, are required to keep specific records on the sale of
products or services, and must follow specified standards regarding product and
service quality.
Advantages and Disadvantages of International Licensing
• A primary advantage of licensing is its relatively low financial risk. In addition,
licensing permits a company to investigate foreign market sales potential without
making significant investment in financial and managerial resources. Licensees
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benefit from the arrangement by being able to make and sell products with a proven
track record, yet incur relatively little R&D cost.
INTERNATIONAL 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. Franchising is one of the fastest growing forms of international
business today.
Basic Issues in International Franchising
• International franchising is more likely to succeed when the franchisor has already
achieved considerable success in franchising in its domestic market; the franchisor
has been successful domestically because of unique products and advantageous
operating systems; the factors that contributed to its domestic success are
transferable to foreign locations; and there are foreign investors who are interested in
entering into franchise agreements. The text illustrates this concept by examining
the franchise agreements of McDonald’s.
Advantages and Disadvantages of International Franchising
• Primary advantages of international franchising are that it allows franchisees to enter
a business with a proven track record, and allows franchisors to expand
internationally at relatively low cost and risk. Franchisors also have the opportunity
to obtain information about local markets that they might otherwise have difficulty
acquiring.
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SPECIALIZED ENTRY MODES FOR INTERNATIONAL BUSINESS
Firms may also use specialized entry modes such as contract manufacturing,
management contracts, and turnkey projects.
Contract Manufacturing
Management Contract
• A management contract is an agreement whereby one firm provides managerial
assistance, technical expertise, or specialized services to a second firm for some
Turnkey Project
• A turnkey project is a contract under which a firm agrees to fully design, construct,
and equip a facility and then turn the project over to the purchaser when it is ready
for operation. International turnkey projects typically involve large, complex, multiyear
projects such as the construction of a nuclear power plant or airport. In some cases,
Business Process Outsourcing
Business process outsourcing (BPO) can include functions as varied as call centers,
technical support, financial analysis, or even tax return preparation. By hiring those
functions out to overseas providers, firms can increase efficiency and lower costs.
India has been a popular BPO destination. However, some firms from the
Netherlands are outsourcing to South Africa (due to language similarities, among
other factors). A Swedish firm has set up call centers in the Baltic states, with French
customers routed to francophone Morocco. Its Spanish call center serves the
Swedish market – because it can hire Swedes in Spain who have moved south to
escape the cold.
FOREIGN DIRECT INVESTMENT
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• Some firms choose to establish operations in a host country at the beginning of their
internationalization effort, while others prefer to use one of the other entry methods
initially, and later invest in facilities in the host country.
The Greenfield Strategy
• A greenfield strategy involves starting from scratch: buying or leasing and
constructing new facilities, hiring and/or transferring managers and employees, and
launching the new operation. The greenfield strategy is attractive because the firm
can select the site that meets its needs best, the firm starts with a clean slate, and
The Acquisition Strategy
• Acquisition strategies (or brownfield strategies) are popular because, unlike other
entry methods, an acquisition quickly gives the purchaser control over the firm’s
factories, employees, technology, brand names, and distribution networks. The text
Joint Ventures
• The joint venture involves an arrangement whereby a new enterprise is created by
two or more firms working together for mutual benefit. Joint venture creation is on the
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CHAPTER REVIEW
1. What are the steps in conducting a foreign market analysis?
2. What are some of the basic issues a firm must confront when choosing an entry mode for a
new foreign market?
When choosing an entry mode for a new foreign market, a firm must confront issues relating
3. What is exporting? Why has it increased so dramatically in recent years?
Exporting, the most common form of international business activity, is the process of
4. What are the primary advantages and disadvantages of exporting?
One of the primary advantages of exporting is its relatively low level of financial exposure. A
5. What are the three forms of exporting?
6. What is an export intermediary? What is its role? What are the various types of export
intermediaries?
An export intermediary is a third party that specializes in facilitating imports and exports.
There are various types of export intermediaries, including export management companies,
7. What is international licensing? What are its advantages and disadvantages?
8. What is international franchising? What are its advantages and disadvantages?
9. What are three specialized entry modes for international business, and how do they work?
10. What is FDI? What are its three basic forms? What are the relative advantages and
disadvantages of each?
FDI is foreign direct investment. The three basic forms of FDI are greenfield investments,
acquisitions, and joint ventures. Greenfield investments involve the construction of new
QUESTIONS FOR DISCUSSION
1. Do you think it is possible for someone to make a decision about entering a particular
foreign market without having visited that market? Why or why not?
2. How difficult or easy do you think it is for managers to gauge the costs, benefits, and risks of
a particular foreign market?
3. How does each advantage in Dunning’s eclectic theory specifically affect a firm’s decision
regarding entry mode?
Dunning’s eclectic theory considers three factors: ownership advantages, location
advantages, and internalization advantages. Ownership advantages affect a firm’s decision
regarding entry mode in that certain types of advantages are more easily transferred
4. Why is exporting the most popular initial entry mode?
5. What specific factors could cause a firm to reject exporting as an entry mode?
6. What conditions must exist for an intracorporate transfer to be cost-effective?
7. Your firm is about to begin exporting. In selecting an export intermediary, what
characteristics would you look for?
8. Do you think trading companies like Japan’s sogo sosha will ever become common in the
United States? Why or why not?
9. What factors could cause you to reject an offer from a potential licensee to make and market
your firm’s products in a foreign market?
10. Under what conditions should a firm consider a greenfield strategy for FDI? An acquisition
strategy?
A greenfield strategy involves setting up an operation from scratch. It is attractive to firms
because it allows them to select the site that is most appropriate for their needs, start with a
clean slate, and acclimate to the local environment at a gradual pace. However, because
BUILDING GLOBAL SKILLS
Essence of the exercise
This exercise begins with a description of Heineken’s global strategy, and then asks students to
identify other products or brands that could or could not use Heineken’s strategy for entering
markets. Students should be assigned to groups for this exercise because it requires that
groups exchange lists of companies that could or could not use the Heineken approach to
international expansion.
Answers to the follow-up questions:
1. What are the specific factors that enable Heineken to use the approach described and
simultaneously make it difficult for some other firms to copy it? What types of firms are most
and least likely to be able to use this approach?
2. What does this exercise teach you about international business?
Students should recognize from this exercise that an international strategy that works well
for some companies might not be effective for other companies. Students should also
recognize that successful global companies such as Heineken might achieve their success
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CLOSING CASE
Heineken’s Global Reach
The closing case explores Heineken NV’s global strategy. In particular, it considers the
strategic moves and selection of entry modes Heineken is making in the U.S. and Europe to
increase its competitiveness.
Key Points:
Heineken NV, the world’s third largest beer producer, earns more than 90 percent of its
revenues outside of the Netherlands. The company is a market leader in every European
country, and sells its beer in North and South America, Africa, Asia, and Australia.
Heineken began exporting beer to the U.S. in 1914, temporarily halted its sales during
Prohibition, and successfully reestablished sales after Prohibition. Heineken’s distributor in the
U.S. was Van Munching & Company.
Today, Heineken brews beer in more than 65 countries. The company expanded into the soft
drink and wine businesses in the 1970s to exploit its bottling technology and global distribution
networks.
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Case Questions
Describe the fundamental issues in foreign market analysis for a firm like Heineken.
First, it must assess the potential for sales of its product in different markets. Next, it must assess
the level of local competition. Next, it must evaluate the legal and political environment. Finally,
it must consider sociocultural influences. For example, in the huge U.S. market, the level of
Discuss the advantages and disadvantages of Heineken’s exporting its beer from one country to
another.
One key advantage is Heineken’s ability to differentiate its product (especially in the U.S.) as an
What are the key issues facing Heineken insofar as international licensing is concerned?
Heineken has largely avoided licensing issues by maintaining ownership of its production
facilities. Not only that, as far as the U.S. market is concerned Heineken has not allowed
production in any U.S. facility (owned by Heineken or not). It continues to export its
domestically produced beer to the U.S. market. This allows it full control of the production
process as well as the claim of truly being an imported beer. However, as noted in the chapter
Why is Heineken so focused on expanding its global sales? (To answer this question, you might
wish to research the actions of the two biggest global brewers Anheuser-Busch InBev and
SABMiller.)
Heineken expects volume development in Latin America, Africa and Asia to benefit from
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(LO: 12-1, AACSB Skills: A; Learning Outcome: Summarize the main entry strategies and
modes that businesses use to enter into foreign markets)
Which markets offer Heineken the best prospects for revenue and profit growth? Are there any
markets you would recommend that Heineken abandon? If so, why?
REVENUE AND VOLUME (2006 VS 2007)
2010 2009
REVENUES 16.1 Billion € 14.7 Billion €
VOLUME (HECTOLITERS) 145.9 Million 125.2 Million
BREAKDOWN BY REGION (2007)
% OF REVENUES
Western Europe 28.5 %
Central and Eastern Europe 9.0 %
Americas 31.5 %
Africa & the Middle East 10.8 %
Asia-Pacific 20.7%
Western Europe
EBIT (beia) grew 17 per cent organically, primarily reflecting the achievement of significant TCM
cost savings across the region, a strong profit improvement in the United Kingdom and an
Central and Eastern Europe
Group beer volume in the region was adversely affected by challenging, but gradually
improving, economic conditions and higher excise duties. Higher volumes in Romania, Austria,
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closure of two breweries and other efficiency improvements resulted in a productivity
improvement and lower fixed costs.
Africa and the Middle East
Volumes were strong, reflecting growth across all markets in the region including Nigeria, South
Americas
Reported 2010 figures in the Americas region include the beer operations of FEMSA as of 1
May 2010. These have now been successfully integrated into Heineken.
Group beer volume in the region grew 0.4 per cent on an organic basis. Volume growth in the