Global Market Participation

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Global Market Participation Entry Strategy
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Industry Globalization Potential
Toward closing the GAP between Potential Actual
MARKET DRIVERS
INDUSTRY GLOBALIZATION POTENTIAL
COST DRIVERS
GOVT DRIVERS
COMPETVE DRIVERS
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Requirements for Global Level of Market
Participation

• Significant global market share
• Reasonable balance between businesss geographic
  spread and markets spread
• Presence in globally strategic markets

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Benefits of Global Market Participation

• Cost reduction
• Economies of scale scope
• Improved quality
• Exposure to demanding customers innovative
  competitors in lead countries, IF willing to
  learn from them
• Enhanced customer preference
• Global availability, service, recognition
• Competitive leverage
• Allow earlier entry into key markets
• More sites for attack/counterattack, subsidizing
  retaliation against competitors in their home
  markets, creating hostages for good behavior
• Guard against complacency, inertia

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Drawbacks of Global Market Participation

• Cross-country factors
• country differences in standards, culture,
  practices
• trade barriers, transportation, inventory
• Coordination costs
• added complexity, layers
• Loss of customer focus
• reduced customization ability

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Basic Entry Decisions

• Which markets to enter?
• When to enter the markets?
• What scale of entry?
• What entry mode?
• Export
• License/Franchise
• JV/Alliance
• Subsidiary/FDI

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Which Foreign Markets?

• Favorable benefit-cost-risk-trade-off
• Politically stable developed and developing
  nations.
• Free market systems
• No dramatic upsurge in inflation or
  private-sector debt.
• Unfavorable
• Politically unstable developing nations with a
  mixed or command economy or where speculative
  financial bubbles have led to excess borrowing..

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Factors Affecting a Markets Global Strategic
Importance

• Beyond stand-alone attractiveness
• Large global share of revenues or profits
• Home market of global customers
• Home market of global competitors
• Significant market of global competitors
• A lead country
• Major source of industry innovation
• Home of most demanding customers

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Business Growth/ Competitive Strength Matrix (Yip)

Competitive Potential of Business in Country
Competitive Strength of Business in Country
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Action Oriented
Country Strategic Importance/ Competitive
Strength Matrix (Yip)
Global Strategic Importance of Country
Competitive Strength of Business in Country
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Timing of Entry

• Advantages in early market entry
• First-mover advantage.
• Build sales volume.
• Move down experience curve and achieve cost
  advantage.
• Create switching costs.
• Disadvantages
• First mover disadvantage - pioneering costs.
• Changes in government policy.

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Scale of Entry

• Large scale entry
• Strategic Commitments - a decision that has a
  long-term impact and is difficult to reverse.
• May cause rivals to rethink market entry.
• May lead to indigenous competitive response.
• Small scale entry
• Time to learn about market.
• Reduces exposure risk.
• Maintain future strategic flexibility

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Entry Modes

• Exporting
• Turnkey Projects
• Licensing
• Franchising
• Joint Ventures
• Foreign Direct Investment (FDI)
• Wholly Owned Subsidiaries

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Exporting
Transport goods into new marketsfrom existing
manufacturing locations

• Advantages
• Avoids cost of establishing manufacturing
  operations.
• May help achieve experience curve and location
  economies if shipping from low factor-cost
  location.
• Disadvantages
• May compete with low-cost location manufacturers.
• Possible high transportation costs.
• Tariff barriers.
• Possible lack of control over marketing reps.

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Turnkey Projects e.g., setting up a new,
ready-to-operate plant for a local

• Advantages
• Can earn a return on knowledge asset.
• Less risky than conventional FDI.
• Disadvantages
• No long-term interest in the foreign country.
• May create a competitor.
• Selling process technology know-how may be
  selling competitive advantage as well.

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Licensing Granting limited rights to intangible
property (e.g., patents, formulas, designs,
trademarks) to foreign entity (licensee) for a fee

• Advantages
• Reduces costs and risks of establishing
  enterprise.
• Overcomes restrictive investment barriers.
• Others can develop business applications of
  intangible property.
• Disadvantages
• Lack of control.
• Cross-border licensing may be difficult.
• Creating a competitor
• Loss of technological know how

Cross-licensing agreements can minimize some of
the disadvantages by creating interdependence
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Franchising Special form of licensing often used
by service firms to sell limited rights to use of
brand name service know-how under strict rules

• Advantages
• Reduces costs and risk of establishing
  enterprise.
• Disadvantages
• May prohibit movement of profits from one country
  to support operations and possible competitive
  strategies in another country.
• Loss of quality service control.
• May be minimized by setting up country
  franchise-management subsidiary

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Joint Ventures/Alliances Work with a local
partner and share in costs/profits of operation

• Advantages
• Benefit from local partners knowledge.
• Shared costs/risks with partner.
• Reduced political risk.
• Disadvantages
• Risk giving control of technology to partner.
• May not realize experience curve or location
  economies or ability to coordinate global attacks
• Shared ownership can lead to conflict.

e.g., GM/Daewoo
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Foreign Direct Investment

• ACTIVE FDI occurs when a firm invests directly
  in facilities to produce and/or market a product
  in a foreign country. NOT PASSIVE (portfolio)
  FDI is not the investment by individuals, firms
  or public bodies in foreign financial
  instruments.
• The firm has significant control of its foreign
  operation.
• Firm can affect managerial decisions of the
  foreign operation.
• A company buying a firm in a different country.
• A firm creating a greenfield operation in a
  different country
• A firm creating a subsidiary in a different
  country.

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Horizontal Direct Investment What, When and Why
Growing Rapidly?

• Horizontal FDI in the same core industry abroad
  as company operates at home.
• Democratization/Globalization of world markets
• Market Imperfections (Most cited)
• Impediments to the free flow of products between
  nations.
• Can circumvent current or future trade barriers.
• Impediments to the sale of know-how.
• Location-specific advantages (country factors
  natural resources, factor costs, etc.).
• Transportation too costly
• Strategic rivalry multi-point rivals imitating,
  jockeying.

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Wholly Owned Subsidiary (FDI) 100 ownership of
a newly built or acquired operation in a country

• Advantages
• No risk of losing technical competence to a
  competitor.
• Realize learning curve and location economies.
• Tight control of operations.
• Enhanced global coordination
• Disadvantage
• Bear full cost and risk.

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Trends FDI Inflows1991 2001
Figure 6.3
1997 Latin America 58bil (Brazil 16bil, Mexico
12bil) Singapore 2 Asian (9bil)
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Gross Fixed Capital Formation

• A summary of the total amount of capital invested
  in factories, stores office buildings, and the
  like.
• All things being equal, the greater the capital
  investment in an economy, the more favorable its
  future growth prospects are likely to be.

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Trends Inward FDI Flows as a Percentage of Gross
Fixed Capital Formation
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Investment in China
China Second Largest Recipient of FDI After US
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Changing Face of Chinas Foreign Investment
Source WSJ, June 11, 1998
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Advantages and Disadvantages of Entry Modes
Entry Mode
Advantage
Disadvantage
High transport costs
Exporting
Ability to realize location and
Trade barriers
experience curve economies
Problems with local marketing agents
Turnkey
Ability to earn returns from
Creating efficient competitors
Lack of long-term market presence
contracts
process technology skills in
countries where FDI is
restricted
Licensing
Low development costs and
Lack of control over technology
risks
Inability to realize location and
experience curve economies
Inability to engage in global strategic
coordination
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Advantages and Disadvantages of Entry Modes
Entry Mode
Advantage
Disadvantage
Franchising
Low development costs and
Lack of control over quality
risks
Inability to engage in global strategic
coordination
Joint
Access to local partners
Lack of control over technology
ventures
knowledge
Inability to engage in global strategic
Sharing development costs
coordination
and risks
Inability to realize location and
Politically acceptable
experience economies
Wholly
Protection of technology
High costs and risks
owned
Ability to engage in global
subsidiaries
strategic coordination
Ability to realize location and
(FDI)
experience economies
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Selecting an Entry Mode
If Technological Know-How is a core competency
Wholly owned subsidiary, except 1. Joint
venture is structured to reduce risk of loss of
technology. 2. Technology advantage is
transitory. Then licensing or joint venture OK.
If Management Know-How is a core competency
Franchising, subsidiaries (wholly owned or joint
venture).
If pressure for Cost Reduction is great
Combination of exporting and wholly owned
subsidiary.
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A Decision Framework

How high are transportation costs and tariffs?
Is know-how amenable to licensing?
Is tight control over foreign operation required?
Can know-how be protected by licensing contract?
Then license
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Pop Quiz

• You are the international manager of a US
  business that has just invented revolutionary
  new personal computer that can perform the same
  functions as IBM and Apple and their clones but
  costs only half as much to manufacture. Your CEO
  has asked you how to expand into the Western
  European market.
• Your options are
• a) export from the US
• b) license a European firm to manufacture the
  computer in Europe
• c) set up a wholly-owned subsidiary in Europe
• Evaluate the pros cons of each option. Which
  is best?