Selecting and Managing Entry Modes

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Selecting and Managing Entry Modes
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Entry Modes

• The institutional arrangement by which a firm
  get its products, technologies, human skills or
  other resources into a market
• - To manufacture and/or sell
• Entry modes depend of several factors
• Ownership advantages of the company
• Location advantages of the market
• International experience
• Potential size of the market
• Ability to develop differentiated products

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Alternative Operating Modes for Foreign Market
Expansion
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Developing an Export Strategy
Step 1
Step 2
Step 3
Step 4
Identify a potential market
Match needs to abilities
Initiate meetings
Commit resources
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Degree of Export Involvement
Direct exporting (sell to buyers)
Indirect exporting (sell to intermediaries)

• Sales representatives
• Distributors

• Agents
• Export management companies
• Export trading companies

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Export Issues

• What does the company want to gain from exporting
• Expand sales, Diversify sales, Gain experience
• Is exporting consistent with company goals
• What demands will exporting place on
• Key management and personnel
• Production capacity
• Financing
• Are the benefits worth the costs
• Could resources be better used developing new
  domestic business

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Characteristics of Exporters

• Probably of being an exporter increases with
  company size defined by revenues
• Export intensity, the of revenues coming from
  exports, is not positively correlated with
  company size

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Phases of Export Development
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Potential Pitfalls of Exporting

• Failure to obtain qualified export counseling and
  to develop a master international marketing plan
• Insufficient commitment by top managers
• Insufficient care in selecting overseas agents or
  distributors
• Chasing orders from around the world instead of
  establishing a base of profitable operations and
  orderly growth

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Potential Pitfalls of Exporting, cont

• Neglecting export business when the domestic
  market booms
• Failure to treat international distributors on an
  equal basis with their domestic counterparts
• Unwillingness to modify products to meet other
  countries regulations or cultural preferences

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Avoiding Export Blunders
Conduct market research
Obtain export advice
Consider a freight forwarder
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Countertrade

• Countertrade is a sale that encompasses more than
  an exchange of goods, services, or ideas for
  money.
• Conditions that favor countertrade lack of
  money, lack of value or faith in money, lack of
  acceptability of money as an exchange medium.
• 25 of the global trade is countertrade related

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Forms of Countertrade
Barter Counterpurchase Offset agreement Switch
trading Buyback
Direct exchange without money Sale to a country
in return for promise of future purchase from it
(reciprocal) Offset a hard-currency sale to a
nation with future hard-currency purchase. (part
of exported good is produced in the importing
country) Sale by a company of an obligation to
purchase from a country Export of industrial
equipment in return for products the equipment
produces
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Example of Countertrade

• Malaysia and Indonesia are bartering palm oil in
  exchange for 18 Russian SU-30 jet fighter planes.
  (According to the Stockholm International Peace
  Research Institute, Russia was the most prolific
  exporter of armaments in 2002, racking up 36 of
  all global deliveries.)
• Indonesia is building and then bartering a 300
  million fertilizer plant in Vietnam, taking back
  rice and sugar in the exchange.
• Oil-rich Libya is bartering fuel to Zimbabwe in
  exchange for beef, coffee and tea.
• Boeing used counterpurchase to sell aircraft to
  Saudi Arabia for oil and to India for coffee,
  rice, castor oil and other goods

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Types of Importers

• Those looking for any product that they can
  import
• Specialized
• Generalized
• Those looking at foreign sourcing to get their
  products at the cheapest prices
• Those looking for foreign sourcing as a part of
  their global supply chain

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Export/Import Financing
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High-Risk Approaches
Advance payment Importer pays exporter for
merchandise before it ships
Open account Exporter ships merchandise
and later bills importer
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Documentary Collection
Bank acts as intermediary without accepting
financial risk
Draft (bill of exchange)
Bill of lading
Document that orders an importer to pay an
exporter a specified sum of money at a specified
time
Contract between an exporter and
shipper specifying destination and shipping
costs for merchandise
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Documentary Collection Process
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Letter of Credit

• Importers bank issues a document stating that
  the bank will pay the exporter when exporter
  fulfills documents terms

• Irrevocable

• Revocable

• Confirmed

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Letter of Credit Process
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Licensing
Company owning intangible property (licensor)
grants another firm (licensee) the right to use
it for a specified time
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Motives for Licensing

• Small expected sales volume
• Limited time of opportunity
• Product is only a small part of companys total
  output
• Local company may be able to produce product
  cheaper
• Local company may have a shorter start-up time

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Franchising
Company (franchiser) supplies another
(franchisee) with intangible property over an
extended period
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Motives for Franchising

• Economies of scale
• Standardization
• Central purchasing
• High identification through promotion
• Learning processes
• Effective cost controls

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Management Contract
Company supplies another with managerial
expertise for a specific period of time

• Advantages
• Few assets risked
• Nations finance projects
• Develops local workforce

• Disadvantages
• Personnel at risk
• Create competitor

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Turnkey Arrangements

• Arrangement in which one company contracts
  another to build complete, ready-to-operate
  facilities
• Typically very large contracts
• Typically construction projects
• Requires top-level contacts abroad
• Motivations
• Export financing
• Managerial and technological quality
• Expertise
• Turnkey operator are specialists in working in
  remote areas often

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Turnkey Project
Company designs, constructs and tests a
production facility for a client
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Wholly Owned Subsidiary
Facility entirely owned and controlled by a
single parent company

• Advantages
• Day-to-day control
• Coordinate subsidiaries

• Disadvantages
• Expensive
• High risk

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Strategic Alliances Objectives
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Strategic Alliance
Entities cooperate (but do not form a separate
company) to achieve strategic goals of each
Advantages Share project cost Tap
competitors strengths Gain channel access
Protect interests
Disadvantages Create competitor Partner
conflict
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Joint Venture

• Separate company created and jointly owned by two
  or more independent entities to achieve a common
  business objective
• Forward Backward Buyback Multistage

• Advantages
• Reduce risk level
• Penetrate markets
• Access channels
• Protect interests

• Disadvantages
• Partner conflict
• Lose control

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Entry Modes Strategic Factors
Cultural environment
Political/Legal environments
Market size
Production and shipping costs
International experience
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Risk, Control, Experience