The Internationalization Process

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The Internationalization Process Market Entry
Strategies
GEB 6365 - INTERNATIONAL BUSINESS EXECUTIVE
MBA September 9, 2006
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Market Entry Decisions

• Foreign Market Selection
• Timing Order of Entry
• Market Expansion Strategies
• Mode of Entry Decisions

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Foreign Market Selection

• Step 1 Preliminary Screening of Foreign Markets
• Key Question
• Which foreign markets warrant further detailed
  investigation?
• Decision Based On
• Intl. Environmental Variables

4
Foreign Market Selection

• Step 2 Assessment of Industry Market Potential
• Key Question
• What is the aggregate demand in each of the
  selected markets?

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• Decision Based On
• Market Access Data
• Product Potential Information
• Infrastructural Facilities

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Foreign Market Selection

• Step 3 Company Sales Potential Analysis
• Key Question
• How attractive is the potential demand for my
  products?
• Decision Based On
• Sales Volume Forecasts

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Timing Order of Entry Decisions

• Sprinkler Approach
• -- Entering Multiple Foreign Markets
  Simultaneously
• Waterfall Approach
• -- Initially Entering One or More Lead Markets
  and Timing Subsequent Entry in a Phased Manner

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Segmentation, Targeting Product Positioning

• Market Segmentation
• Dividing the market into distinct groups of
  buyers with different needs, characteristics
  and/or behavior
• Market Targeting
• Evaluating each market segments
  attractiveness and selecting one or more market
  segments to enter
• Product Positioning
• Planning for the product to occupy a clear,
  distinctive, and desirable place relative to
  competing products in the mind of target customers

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Consumer Market Segmentation

• Geographic
• Different geographical regions, cities,
  countries
• Demographic
• Age, sex, income, education, occupation,
  religion, race, nationality
• Psychographic
• Social class, lifestyles, personalities
• Behavioral
• Purchase occasion, benefits sought, user
  status, usage rate, loyalty

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International Market Segmentation Approaches

• Develop Cut-Off Criteria
• Shortlist based on Preliminary Screening
• Microsegmentation
• Individual Country based
• Cross-border segments

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Requirements for Effective Segmentation

• Measurable
• Sizable
• Accessible
• Actionable

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Target Marketing

• Evaluating Market Segments
• segments size and growth
• segment structural attractiveness (Competitive
  Intensity)
• company objectives and resources
• Selecting Market Segments

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Global Target Market Strategies

• Universal Segments
• Global Teen Segment
• Standardized Approach
• Differentiated Strategies
• Diverse Segments
• Same product, different target segments
• Canon AE-1 Camera
• Mixed Strategy

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A Comparison of U.S. and Mexican Ads for Speed
Stick Brand Deodorants
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Comparison of Perceptions of U.S. v.s. Mexican
Males
IDEAL VECTOR (Mex)

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Comparison of Perceptions of U.S. v.s. Mexican
Females
LACK OF RESIDUE
IDEAL VECTOR (U.S.)
IDEAL VECTOR (Mex)
EFFECTIVENESS
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Market Expansion Strategies

• Concentration vs Diversification
• Countries vs Segments
• Conc Div
• Conc 1 2
• Div 3 4

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Market Expansion Strategies

• Strategy 1
• When product appeals to a definite group of
  customers across markets and cost of penetration
  is very high (HDTV)
• Strategy 2
• When product line appeals to different segments
  cost of penetration is relatively high
  (consumer electronic goods)

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Market Expansion Strategies

• Strategy 3
• Defined homogenous segments across markets
  (Benz, Jaguar, etc.)
• Strategy 4
• Products with mass appeal with relatively low
  cost of penetration (most consumer non-durable
  goods)

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Choice of Entry Modes

• Exporting
• Direct vs Indirect
• Contractual Agreements
• Licensing, Franchising, etc.
• Equity Based
• Joint Ventures
• WOS
• Strategic Alliance

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Choosing the Mode of Entry

• Decision Criteria for Mode of Entry
• Market Size and Growth
• Risk
• Government Regulations
• Competitive Environment
• Local Infrastructure

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Choosing the Mode of Entry (cont)

• Company Objectives
• Need for Control
• Internal Resources, Assets, and Capabilities
• Flexibility
• Mode of Entry Choice A Transaction Cost
  Explanation

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Exporting

• Indirect Exporting
• Cooperative Exporting
• Direct Exporting

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Stages in the Export Process

• Uninterested
• Partially Interested
• Exploring
• Experimental
• Experienced

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Indirect Channels of Exports

• Merchants vs Agents
• Trading company
• General Trading Companies
• Sogo Shosha (C. Itoh Mitsui, Mitsubishi, etc.)
• Export Trading Companies
• Daewoo, Sears World Trade
• Export/Import Broker
• Export Management Company
• international sales specialists who function as
  the export dept. of mfrs.

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Cooperative Arrangements

• Piggyback Marketing
• GE Borg-Warner, etc.
• Marketing Cooperative Associations
• Export Cartels
• OPEC
• DeBeers Central Selling Orgn.
• Webb-Pomerene Associations

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Direct Channels of Exports

• Export departments
• Export Sales Subsidiary
• Foreign Sales Branch/Subsidiary
• Storage or Warehousing facilities
• Travelling Salesperson

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Advantages and Disadvantages of Entry Modes
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Advantages and Disadvantages of Entry Modes
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International Strategic Alliances

• Strategic Alliance
• refers to any type of cooperative agreements
  between two or more firms who are potential or
  actual competitors.
• Can take multiple forms including JVs, RD
  collaborations, piggy backing, sourcing
  relationships, etc.

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International Strategic Alliances

• In general, any relationship that involves mutual
  dependence and shared decision making between two
  or more firms can be characterized as a strategic
  alliance.
• It differs from traditional JVs in that
• strategic alliances are increasingly between
  firms in the industrialized nations
• the focus is on creation of new products and
  technologies rather than the distribution of
  existing ones

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Why Strategic Alliances?

• Rising RD Costs
• Shortening Product Life Cycles
• Growing Barriers to Market Entry
• Increasing Need for Global Scale Economies
• Expanding Importance of Global Standards
• Forms the basis of Building and Sustaining
  Competitive Advantage in Industries undergoing
  major Transitions

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Managing International Alliances

• The Logic of Collaboration
• Identifying when, where, and why to collaborate
• An alliance is usually one of several options for
  pursuing a strategic goal it is never an end in
  itself
• Strategic Goals Product Exchange Corporate
  Learning Market Positioning
• Cost-Benefit Tradeoffs
• Alternatives to Collaboration Self-Sufficiency
  Buying the Inputs or Skills Full Acquisition.

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Key Issues in Managing International Alliances

• Selecting Partners
• Knowing how to maximize benefits and minimize
  risks of partnerships
• Complementary needs and assets
• Structuring Alliances
• Choosing organizational forms that provide
  incentives for success
• Contracts vs. Equity Relationships

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Key Issues in Managing International Alliances

• Building Alliance Networks
• Creating a system of reinforcing alliances, and
  avoiding chaos
• Network Design Is the whole greater than the sum
  of the parts?
• Who controls the network? Where is
  competitive advantage created?
• Alliance Dynamics
• Managing with an eye to the forces for change in
  a relationship

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Key Issues in Managing International Alliances

• Limits to Alliances
• Recognizing the constraints on collaborative
  strategies
• Organizational Constraints Strategic Gridlock
  Dependence
• The Role of Governments
• Antitrust laws
• Host government intervention

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INCOTERMS

• Ex-works (EXW)
• Free Carrier (FCA)
• inland vs destination point
• Free Alongside Ship (FAS)
• seller responsible for inland transportation.
  unloading and wharfage
• Loading, ocean transportation and insurance are
  buyers responsibilities

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INCOTERMS

• Free on Board (FOB)
• Cost Freight (CFR)
• Cost, Insurance Freight (CIF)
• port charges
• documentation charges
• other charges
• Delivery Duty Paid (DDP)

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Terms of Payment

• Consignment
• Open Account
• Documents against Acceptance (Time Draft)
• Documents against Payment (Sight Draft)
• Letter of Credit
• Confirmed LC
• Cash in Advance

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Letter of Credit

• A Letter of Credit is an instrument issued by a
  bank, at the request of a buyer.
• The bank promises to pay a specified amount of
  money on presentation of documents stipulated in
  the L.C.

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Letter of Credit

• Irrevocable vs Revocable LC
• An irrevocable L.C. cannot be modified or
  cancelled without the consent of the exporter
• Confirmed vs Unconfirmed
• A confirmed L.C. is one where a domestic bank
  certifies the credibility of the issuing bank
• Revolving vs Non-revolving

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Bill of Lading

• The bill of lading is a document used in ocean
  transportation that serves 3 distinct functions
• it is the contract of carriage between the
  shipper and the transportation company
• it is a receipt of goods
• it is evidence of title to the merchandise

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Export Pricing Strategies

• Standard Worldwide Pricing
• Rigid Cost-Plus Pricing
• Marginal Cost-Plus Pricing
• Market-Differentiated Pricing

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Price Escalation

• Export Related Costs
• Cost of adapting products to foreign markets
• Operational costs
• personnel
• market research
• shipping insurance
• communication costs
• Tariffs Taxes
• Costs associated with hedging, factoring/forfaitin
  g

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Strategic Options to Deal with Price Escalation

• Reorganizing/shortening the distribution channel
• Product modification (backward innovation)
• Shipping Assembling components in Free Trade
  Zones
• Overseas Production or sourcing (duty drawbacks)

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Marginal vs Rigid Cost-Plus Pricing

• Firm-specific Factors
• Extend of product differentiation
• Corporate stance toward exporting
• Financial resources to sustain initial losses
• Domestic Gross Margins
• Need for long term capacity utilization
• Economies of scale benefits

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Marginal vs Rigid Cost-Plus Pricing

• Export Market Specific Factors
• Growth Potential
• End-User Price Sensitivity
• Competitive Intensity
• Terms of Sale Financing
• Exchange rate risk

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Export Strategies When Domestic Currency is Weak

• Stress Price Benefits
• Expand Product line and add more costly features
• conduct conventional cash-for-goods sale
• use rigid cost-plus pricing wherever possible
• Bill foreign customers in domestic currency

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Export Strategies When Domestic Currency is Weak

• Minimize expenditures in host country currency
• Minimize borrowing in host country
• Buy needed services (advertising, insurance,
  etc.) in domestic market

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International Transfer Pricing

• Transfer pricing is the pricing of sales within
  members of a corporate family
• HQ to Subsidiaries
• Subsidiaries to HQ
• Subsidiary to Subsidiary

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Why Use Transfer Pricing?

• Reduction of Taxes
• Reduction of Tariffs
• Increase Competitiveness of certain foreign
  markets
• Minimization of foreign exchange risks
• Minimization of political risks
• Management of cash flows

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Types of International Transfer Pricing

• Cost-based
• most effective strategy but open to tough laws
• market based (dealer price)
• arms-length transaction

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Why Use Countertrade?

• Lack of money
• Lack of value of money
• Nonconvertibility of currency
• Offset financial risk

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• Other factors that make it more efficient to
  exchange goods directly than to use money as an
  intermediary
• As a competitive strategy
• Excellent mechanism to get a foothold into
  foreign markets

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Major Drawbacks
Instead of there being a double coincidence of
wants, there is likely to be a want of
coincidence so that, unless a hungry tailor
happens to find an undraped farmer, who has both
food and a desire for a pair of pants, neither
can make a trade. Paul Samuelson
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• Transactions purely bilateral in nature and thus
  are not competitive
• Trade is formulated on the basis of the
  willingness to countertrade and not on economic
  considerations
• Creates economic inefficiencies

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Types of Countertrade

• Counterpurchase or parallel barter (46)
• Involves both cash kind transactions
• Parallel reciprocity (a special case)
• Buyback (11)
• Technology in return for finished goods
• Levi Strauss in Hungary

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• Offset (27.5)
• Cost offsets through investments
• Can be in multiple forms
• Common in high cost deals (defense)
• Swaps (11)
• Debt for debt swaps
• Debt for equity swaps
• Debt for product swaps
• Debt for education swaps

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• Clearing Arrangements
• Extend over long period
• Involve basket of goods
• Held as deposits representing purchasing power
  (credit - debit account)
• Switch Trading (4.5)
• A type of clearing arrangement where credit can
  be sold or transferred to a third party

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Information Requirements for Intl. Marketing
Depends on the type of decision

• Strategic Decisions
• Foreign market selection
• Mode of entry decision
• Product/Market portfolio strategies
• Market expansion strategies
• Tactical Decisions
• Marketing mix strategies for individual country
  markets

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Measurement
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Problem Identification and Definition

• Problem may not always be couched in the same
  terms in different countries or cultural contexts

Beware of self-reference criterion Eg Why
doesnt powder detergent sell in Africa?
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Issues in Multi-Country Data Collection

• Availability
• Accuracy
• Comparability (the issue of equivalence)
• Cost

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The EMIC - ETIC Dilemma
The schools of thought

• EMIC
• Each culture is unique
• Advocates culture-specific approach
• ETIC
• Assessing universal attitudes and behavior
• Advocates culture-free approach

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Major Sources of Secondary Data for IMR

• U.S. government
• Other government embassies
• International organizations
• Directories and newsletters
• Electronic databases

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Primary Sources of Data

• Qualitative research methods
• Survey research
• Experimentation

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Qualitative Research

• Individual interviews
• Focus groups
• Projective techniques
• Observational methods

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Cultural Influences

• Language
• Unavailability of certain segment of population
• Interviewing women in Saudi Arabia
• Interviewer bias

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• Not all societies encourages frank and open
  exchanges
• High context vs low context cultures
• Status consciousness
• Gender roles
• Role of elders
• Disagreement may be seen as impolite or certain
  topics may be taboo
• differences in perceptions and attitudes

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Survey Research

• Mail Survey
• Efficiency of postal system
• Absence of street and house numbers
• Eg In Venezuela houses have names (Casa Rosa)
  not numbers
• Literacy rate
• Reluctance to respond in writing particularly
  sensitive issues (Eg ownership of imported cars
  in Brazil)

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• Telephone Survey
• Availability of telephones
• Efficiency of telephone system
• Eg Hung up - Russian telephone system
• Mall Intercepts
• Not common outside U.S

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Questionnaire Design

• Format
• Structured vs Unstructured
• Direct vs Indirect
• Content
• Sensitivity of cultures
• Wording
• Translation-Re-translation

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The Issue of Equivalence

• Construct Equivalence
• Are we studying the same phenomenon in countries
  X, Y, and Z?
• Eg Bicycles

- Recreation/exercise in the U.S. - Basic mode of
transportation in developing countries
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• Measurement Equivalence
• Are the phenomenon in countries X, Y, and Z
  measured the same way?
• Eg Questionnaire translation and interpretation
  issues
• Sampling Equivalence
• Are the samples used i countries X, Y, and Z
  equivalent?
• Eg Literacy rates

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Key Pitfalls in Conducting an International
Marketing Research

• Selecting a domestic research company to do your
  international research
• Rigidly standardizing methodologies across
  countries
• Interviewing in English around the world
• Setting inappropriate sampling requirements
• Lack of consideration given to language
• Lack of systematic intl. communications procedure
• Misinterpreting multi-country data across
  countries
• Not understanding cultural differences while
  conducting qualitative research