2009 FIDM/The Fashion Institute of Design & Merchandising BUMT 3850 - Chapter 5 & 6 Notes Slide 1 Chapters 5 & 6 Here chapter 5 and 6 are combined because these 2 chapters focus on choosing the appropriate entry mode into a new market. Entering a New Market Global Marketing, BUMT 3850 Regina Korossy 1 / 28 Slide 2 Wal-Mart: Not Knowing Enough Wal-Mart is one of the largest retailers in the world, with: o Over 4,500 stores o 1.5 million associates o $280 Billion in sales Wal-Mart establishes its competitive advantage, based on a combination of: o Efficient merchandising, o Buying power, and o Human relations policies. o Also, they were considered a leader in product sales information systems, in the world. 2 / 28 Many companies struggle with their first efforts entering a new foreign market here s one example. Wal-Mart (around since 1962, established by Sam Walton now the largest retailer in the world, with more than 4,500 stores and 1.5 million associates the term they use for their employees; $280 billion in sales) made some of the same mistakes when it tried to enter new markets. Wal-Mart establishes its competitive advantage, based on a combination of: Efficient merchandising, Buying power, and their Human relations policies. Also, they were considered to be a leader in the implementation of information systems used to track product sales and inventory, in the world. These practices led to very high productivity that enabled Wal-Mart to drive down its operating costs, which it then passed on to consumers in the form of lower prices than their competitors. This was a strategy that enabled Wal- Mart to gain market share first in general merchandising, where it now dominates, and later in food retailing where its taking market share away from established supermarkets. However, by 1990, the company realized that it s opportunities for growth in the US were becoming more limited. So the company decided to expand globally. Their first international target was Mexico.
Slide 3 Wal-Mart Wal-Mart moved into other countries for three reasons o Growth opportunities at home were becoming constrained o It thought it could create value by transferring its business model to foreign markets o It wished to preempt other retailers that were also starting to expand globally Wal-Mart initially treated foreign markets much like the US; it quickly discovered that this was not the correct approach. Slide 4 Wal-Mart By 2004, Wal-Mart was more than twice the size of its nearest competitor. o With 670 stores o Revenues of more than $11 billion Since then, Wal-Mart has expanded into 11 other countries. The company has more than: o 1,500 stores outside the U.S. o Employing more than 330,000 o Generating revenues of more than $50 billion annually outside the U.S. 3 / 28 Wal-Mart moved into other countries for three main reasons: The growth opportunities at home were becoming constrained; They thought it could create value by transferring its existing business model into foreign markets; and, It wished to preempt their competition (other retailers) that were also starting to expand globally. So they wanted to have first-mover advantage in those markets. The Mexico operation was established as a joint venture with the largest retailer in Mexico (Cifera). However, Wal-Mart failed to research doing business in Mexico sufficiently. As a result, they painfully had to learn that Mexico s poor infrastructure, crowded roads, and lack of leverage with local suppliers, many of which would not or could not deliver directly to Wal-Mart s stores or distribution centers, resulted in stocking problems and raised costs and prices as much as 20% above US prices. This of course would limit Wal-mart s ability to gain market share. There were also problems with merchandise selection many of the stores in Mexico carried the same items that were popular in the US stores (ice skates, lawn mowers, leaf blowers, and fishing tackle). It was not surprising that these items did not sell well in Mexico. So managers would slash prices to move the inventory, only to find out that the company s automated tracking system would order more inventory as soon as it was running low to replenish the depleted stock!! By the mid-90 s they learned from its mistakes and adapted its Mexico operations to match the local environment. By 2004, Wal-mart was more than twice the size of its nearest competitor in Mexico with 670 stores and revenues of more than $11 billion. It has since expanded into 11 other countries, including: Canada, Britain, Germany, Japan, South Korea; Puerto Rico, Brazil, Argentina, and China. Sometimes by acquiring other retailers and then transferring its information systems, logistics, and management expertise and sometimes by opening their own stores. As a result, the co. had more than 1,500 stores outside the US, employing 330,000 individuals and generating international revenues of more than $50 billion annually. 4 / 28 BUMT 3850 Chapter 5&6 Notes -- 2
Slide 5 Wal-Mart Wal-Mart had to customize its offering to local conditions while keeping its core strategies and operations the same in every market Going global has yielded additional benefits as well o Enhanced bargaining power with suppliers o The ability to transfer valuable ideas from one country to another So, to succeed abroad, Wal-Mart had to customize its offering to local conditions while keeping its core strategies and operations the same in each market. Going global has yielded additional benefits for Wal Mart as well: 1 st, Wal-Mart has been able to reap economies of scale from their global buying power; and 2 nd, they benefited from the flow of ideas from across 11 countries in which it now competes. This example shows that even a giant can stumble in executing a strategy in an international setting!! 5 / 28 Slide 6 Entry Modes Firms can use six different methods to enter a market: 1. Exporting 2. Turnkey Projects 3. Licensing 4. Franchising 5. Joint Ventures 6. Wholly Owned Subsidiaries Firms choose from six different methods to enter a market: these are, Exporting, Turnkey Projects, Licensing, Franchising, Joint Ventures aka j-vs, and Wholly-Owned Subsidiaries. We ll go over the advantages and the disadvantages of each of these methods to entry. 6 / 28 Slide 7 The Exporting Option Indirect Exporting: Export management companies perform all the transactions relating to foreign trade for the firm and are independent agents working for the firm in overseas markets, going to fairs, and contacting distributors. o The advantage is that the firm avoids the overhead costs and administrative burden involved in managing their own export affairs o The disadvantage is that the skills and know-how developed through experiences abroad are accumulated outside the firm, not in it Direct Exporting: The firm is able to more directly influence the marketing effort in the foreign market. o Advantage over indirect exporting is the control of operations. 7 / 28 The Exporting Option Indirect Exporting: Export management companies perform all the transactions relating to foreign trade for the firm and are independent agents working for the firm in overseas markets, going to fairs, and contacting distributors. o The advantage is that the firm avoids the overhead costs and administrative burden involved in managing their own export affairs o The disadvantage is that the skills and know-how developed through experiences abroad are accumulated outside the firm, not in it Direct Exporting: The firm is able to more directly influence the marketing effort in the foreign market. o Advantage over indirect exporting is the control of operations. BUMT 3850 Chapter 5&6 Notes -- 3
Slide 8 Exporting Functions Product Shipment o Transportation The shipment of the product to the border of the country is usually handled by an independent freight forwarder o Clearing through Customs Unloaded at the national border, the product will go from the ship or airline to a customs-free depot before being processed through customs o Warehousing After entering the country, the goods will often require storage 8 / 28 Exporting Functions Product Shipment o Transportation The shipment of the product to the border of the country is usually handled by an independent freight forwarder o Clearing through Customs Unloaded at the national border, the product will go from the ship or airline to a customs-free depot before being processed through customs o Warehousing After entering the country, the goods will often require storage Slide 9 Exporting Functions Export Pricing o Price Quotes Prices quoted CIF (cost-insurance-freight the seller accepts the responsibility for product cost, insurance, and freight) is the recommended alternative for an export marketer. o Trade Credit A high price can often be counterbalanced by beneficial trade credit terms o Price Escalation Due to transportation costs, tariffs and other duties, special taxes, and exchange rate fluctuations, export prices tend to escalate. Still, competitive conditions and a desire to penetrate a new market often makes overseas prices lower than at home. Slide 10 Direct Exporting: Local Distribution o Finding a Distributor The most common approach is to use existing channels, found via: assistance of governmental agencies trade fairs and international conventions o Screening Distributors On key performance criteria The financial strength of the distributor is less important if the entering firm can support the company in the start-up period 9 / 28 10 / 28 Exporting Functions Export Pricing o Price Quotes Prices quoted CIF (cost-insurance-freight the seller accepts the responsibility for product cost, insurance, and freight) is the recommended alternative for an export marketer. o Trade Credit A high price can often be counterbalanced by beneficial trade credit terms o Price Escalation Due to transportation costs, tariffs and other duties, special taxes, and exchange rate fluctuations, export prices tend to escalate. Still, competitive conditions and a desire to penetrate a new market often makes overseas prices lower than at home. Direct Exporting: Local Distribution Finding a Distributor o The most common approach is to use existing channels, found via: assistance of governmental agencies trade fairs and international conventions Screening Distributors o On key performance criteria o The financial strength of the distributor is less important if the entering firm can support the company in the start-up period BUMT 3850 Chapter 5&6 Notes -- 4
Slide 11 Exporting Advantages: o Avoids cost of establishing manufacturing operations o May help achieve experience curve and location economies Disadvantages: o May compete with low-cost location manufacturers o Possible high transportation costs o Tariff barriers o Possible lack of control over marketing reps Exporting avoids costs of investing in new manufacturing locations and may help achieve experience curve and location economies. However, exporting also faces challenges from tariff barriers, transportation costs, control over marketing, and local lowcost manufacturers. 11 / 28 Slide 12 The Exporting Option: Dumping Dumping: Selling goods in some markets below cost. o Reverse Dumping Refers to the practice of selling products at home at prices below cost. o Countervailing Duty An assessment levied on the foreign producer that brings the prices back up over production costs and imposes a fine The usual penalty for manufactures found to violate antidumping laws. o Illegal but common reason for dumping: Entry into a large competitive market by selling at very low prices when a company has overproduced and wants to sell Slide 13 the product in a market where it has no brand franchise. 12 / 28 Dumping and the WTO New World Trade Organization trade rules regarding dumping Intended to support emerging countries exports Features include Stricter definitions of injury Higher minimum dumping levels needed to trigger imposition of duties More rigorous petition requirements Dumping duty exemptions for new shippers The Exporting Option: Dumping Dumping: Selling goods in some markets below cost. o Reverse Dumping Refers to the practice of selling products at home at prices below cost. o Countervailing Duty An assessment levied on the foreign producer that brings the prices back up over production costs and imposes a fine The usual penalty for manufactures found to violate antidumping laws. o Illegal but common reason for dumping: Entry into a large competitive market by selling at very low prices when a company has overproduced and wants to sell the product in a market where it has no brand franchise. Dumping and the WTO New World Trade Organization trade rules regarding dumping o Intended to support emerging countries exports o Features include Stricter definitions of injury Higher minimum dumping levels needed to trigger imposition of duties More rigorous petition requirements Dumping duty exemptions for new shippers 13 / 28 BUMT 3850 Chapter 5&6 Notes -- 5
Slide 14 Turnkey Projects Advantages: o Can earn a return on knowledge asset o Less risky than conventional FDI Disadvantages: o No long-term interest in the foreign country o May create a competitor o Selling process technology may be selling competitive advantage as well There are companies that specialize in the design, construction, and start-up of some businesses in certain industries. These are called Turnkey Projects, where a contractor agrees to handle every detail of a project for the foreign client. Turnkeys allow a company to earn a return on their knowledge assets and are usually less risky than conventional FDI (foreign direct investment). The disadvantages of Turnkey projects are that there is no long-term interest in the location, the project may create a competitor, and process technology may be selling a competitive advantage. 14 / 28 Slide 15 Licensing Advantages: o Reduces development costs and risks of establishing foreign enterprise o Lack capital for venture o Unfamiliar or politically volatile market o Overcomes restrictive investment barriers o Others can develop business applications of intangible property Disadvantages: o Reduces control over manufacturing, marketing, and strategy o Limits a firm s ability to utilize coordinated strategies o May give the recipe away with the license Licensing is an arrangement in which a licensor gives the right to intangible property to another entity (called a licensee) for a certain period of time, and in return the licensee pays the licensor royalties. This is often used in the movie industry. Warner Bros. will allow theaters other countries to play their movies and in return, they get a fee. Licensing does not bear the costs and risks of investment and avoids political and/or economic restrictions in a country. However, the disadvantage are that it can reduce a firm s control over their manufacturing, marketing, and strategy and make it difficult or impossible to benefit from experience curve and location economies. It limits a firm s ability to utilize a coordinated strategy across different countries, where the company can use the profits earned in one country to support attacks on the competition in another country. And maybe most importantly, it may give the recipe away with the license 15 / 28 Slide 16 Franchising Advantages: o Reduces costs and risk of establishing enterprise Disadvantages: o May prohibit movement of profits from one country to support operations in another country o Quality control Franchising is very similar to Licensing, but in franchising companies are usually talking about longer-term commitments. Franchising reduces costs and risks, avoids political/economic restrictions, and allows for quicker expansion. Disadvantages include loss of control over quality. The MOST important requirement for successful franchising is the standardization of products and services. Curve exercise facilities are franchises, as are many fast-food establishments. 16 / 28 BUMT 3850 Chapter 5&6 Notes -- 6
Slide 17 Equity and Non-Equity SA s Equity Strategic Alliances o Joint Ventures Non-Equity Strategic Alliances o Distribution Alliances o Manufacturing Alliances o Research and Development Alliances JV s are a firm that is owned by 2 or more other firms. One of those firms is usually already in the foreign country and the other is usually already doing business in the host country. Joint Ventures benefit from local partner's knowledge, shared costs, and reduced risk. The disadvantages include loss of control over technology and potential conflict between the partners. 17 / 28 Slide 18 Equity Alliances: Joint Ventures Joint Ventures: Involve the transfer of capital, manpower, and usually some technology from the foreign partner to an existing local firm. o Examples include Rank-Xerox, 3M-Sumitomo, several China entries where a governmentcontrolled company is the partner. o This was the typical arrangement in past alliances the equity investment allowed both partners to share both risks and rewards. o Today non-equity alliances are common. Equity Alliances: Joint Ventures Joint Ventures: Involve the transfer of capital, manpower, and usually some technology from the foreign partner to an existing local firm. Examples include Rank-Xerox, 3M-Sumitomo, several China entries where a government-controlled company is the partner. This was the typical arrangement in past alliances the equity investment allowed both partners to share both risks and rewards. Today non-equity alliances are common. 18 / 28 Slide 19 Joint Ventures Advantages: o Benefit from local partner s knowledge o Shared costs/risks with partner o Reduced political risk Disadvantages: o Risk giving control of technology to partner o May not realize experience curve or location economies o Shared ownership can lead to conflict JV s are a firm that is owned by 2 or more other firms. One of those firms is usually already in the foreign country and the other is usually already doing business in the host country. Joint Ventures benefit from local partner's knowledge, shared costs, and reduced risk. The disadvantages include loss of control over technology and potential conflict between the partners. 19 / 28 BUMT 3850 Chapter 5&6 Notes -- 7
Slide 20 Rationale for Non-Equity Alliances Tangible economic gains at lower risk. Access to technology. Markets are reached without a long buildup of relationships in channels. Efficient manufacturing made possible without investment in a new plant. SA s allow two companies to undertake missions impossible for one individual firm to undertake. Strategic Alliances constitute an efficient economic response to changed Tangible economic gains at lower risk. Access to technology. Markets are reached without a long buildup of relationships in channels. Efficient manufacturing made possible without investment in a new plant. SA s allow two companies to undertake missions impossible for one individual firm to undertake. Strategic Alliances constitute an efficient economic response to changed conditions. 20 / 28 Slide 21 Distribution Alliances o Also called piggybacking, consortium marketing o Examples SAS, KLM, Austrian Air, and Swiss Air STAR Alliance (United Airlines, Lufthansa, Air Canada, SAS, Thai Airways, and Varig Brazilian Airlines) Chrysler and Mitsubishi Motors Also, a part of licensing. These make sense because these relationships allow improved capacity and wider product lines for one partner; and an inexpensive and quick access to a market for another partner. This way each partner can focus on their core competencies. So in the example of an airline. They can piggyback on the hub of another airline so as not to have to build one of their own. It s more cost effective for both, because they share the costs. 21 / 28 Slide 22 Pros and Cons of Distribution Alliances Advantages o Improved capacity load o Wider product line o Inexpensive access to a market o Quick access to a market o Assets are complimentary o Each partner can concentrate on what they do best Disadvantages o Time arrangement can limit growth for the partners o Can hinder learning more about the market, creating obstacles to further inroads 22 / 28 Pros and Cons of Distribution Alliances Advantages Improved capacity load Wider product line Inexpensive access to a market Quick access to a market Assets are complimentary Each partner can concentrate on what they do best Disadvantages Time arrangement can limit growth for the partners Can hinder learning more about the market, creating obstacles to further inroads BUMT 3850 Chapter 5&6 Notes -- 8
Slide 23 Manufacturing Alliances Manufacturing alliances involve the brands of both manufacturers with their existing core competencies in the manufacturing of the parts. Shared manufacturing examples o Volvo and Renault share body parts and components o Saab engines made by GM Europe Advantages o Convenient o Money saving Disadvantages o The organization must deal with two principals in charge of production, harder to communicate customer feedback o Can put constraints on future growth 23 / 28 Slide 24 R&D Alliances R&D Alliances: Provide favorable economics, speed of access, and managerial resources and are intended to solve critical survival questions for the firm. o Used to be seen as particularly risky, since technological know-how is often the key competitive advantage of a global firm. o The risk of dissipation has become less of a concern, however, as technology diffusion is growing ever faster. The increasing pace of technological change has been a major force behind the emergence of R & D alliances. Page: 167 R&D Alliances: Provide favorable economics, speed of access, and managerial resources. They are intended to solve critical survival questions for the firm. R&D alliances used to be considered as risky, because companies feared they would give away the farm and their key competitive advantage by sharing this sort of information. However, as technology is growing faster, the risk of dissipation has become less of a concern. And instead companies will team up just to make sure they both remain in the game. 24 / 28 Slide 25 Wholly-Owned Subsidiary Subsidiaries could be greenfield investments or acquisitions Advantages: o No risk of losing technical competence to a competitor o Tight control of operations o Realize learning curve and location economies Disadvantage: o Bear full cost and risk In a wholly-owned subsidiary, the firm owns all of the company s stock. There are 2 ways to create wholly-owned subsidiaries in another country. One is to create what s called a Greenfield investment (a new operation in that country) or by acquiring an already existing firm in that host nation. This approach to a new market offers the most control and the highest level of risk and cost. 25 / 28 BUMT 3850 Chapter 5&6 Notes -- 9
Slide 26 Manufacturing Subsidiaries Wholly Owned Manufacturing Subsidiaries are undertaken by the international firm for several reasons: To acquire raw materials To operate at lower manufacturing costs To avoid tariff barriers To satisfy local content requirements Manufacturing Subsidiaries Wholly Owned Manufacturing Subsidiaries are undertaken by the international firm for several reasons: o To acquire raw materials o To operate at lower manufacturing costs o To avoid tariff barriers o To satisfy local content requirements 26 / 28 Slide 27 Manufacturing Subsidiaries Advantages Local production lessens transport/import-related costs, taxes & fees Availability of goods can be guaranteed, delays may be eliminated More uniform quality of product or service Local production says that the firm is willing to adapt products & services to the local customer requirements Disadvantages Higher risk exposure Heavier pre-decision information gathering & research evaluation Political risk Country-of-origin effects can be lost by manufacturing elsewhere. Slide 28 FDI: Acquisitions o Instead of a greenfield investment, the company can enter by acquiring an existing local company. o Advantages Speed of penetration Quick market penetration of the company s products 27 / 28 o Disadvantages Existing product line and new products to be introduced might not be compatible Can be looked at unfavorably by the government, employees, or others Necessary re-education of the sales force and distribution channels 28 / 28 Manufacturing Subsidiaries Advantages Local production lessens transport/import-related costs, taxes & fees Availability of goods can be guaranteed, delays may be eliminated More uniform quality of product or service Local production says that the firm is willing to adapt products & services to the local customer requirements Disadvantages Higher risk exposure Heavier pre-decision information gathering & research evaluation Political risk Country-of-origin effects can be lost by manufacturing elsewhere. FDI: Acquisitions Instead of a greenfield investment, the company can enter by acquiring an existing local company. Advantages Speed of penetration Quick market penetration of the company s products Disadvantages Existing product line and new products to be introduced might not be compatible Can be looked at unfavorably by the government, employees, or others Necessary re-education of the sales force and distribution channels BUMT 3850 Chapter 5&6 Notes -- 10
Slide 29 Mode of entry Independent agent Exporting Marketing Control Absolut vodka in the US Join with alliance partner Toshiba EMI in Japan Own sales subsidiary Volvo in the US Licensing Disney in Japan Microsoft in Japan Nike in Asia Strategic Alliance Autos in China EuroDisney FDI Entry Modes & Local Marketing Control The local marketing can be controlled to varying degrees, quite independent of the entry mode chosen. The typical global firm maintains a sales subsidiary to manage the local marketing. Examples: Slide 30 Company Strategic Posture Incremental Goldstar in the US Emerging Indirect exports Mitsubishi Motors in US Product/Market Situation High- Growth Indirect exports Protected Joint Venture Indirect exports Control Mature Black & Decker in China P & G in the EU 29 / 28 Optimal Entry Mode Matrix Wholly owned subsidiary Acquisition/ Alliance Direct exports Alliance/Licen sing Wholly owned subsidiary Services Licensing Alliance Licensing Franchising/ Alliance Exporting The local marketing can be controlled to varying degrees, quite independent of the entry mode chosen. The typical global firm maintains a sales subsidiary to manage the local marketing. Examples: This matrix shows that the optimal entry mode will be different depending the product and market situation. If the company is taking a protected position then a joint venture makes sense in an emerging market whereas licensing may make more sense in a mature market. We will look further at emerging, high-growth, and mature markets in future chapters. 30 / 28 Slide 31 AMOUNT OF LEARNING Cultural Distance & Learning Early Entry Some learning Gradual Entry More learning Late Entry Learning and unlearning The more similar the country and cultures are the less amount of learning you need to do to familiarize yourself about that market. SIMILAR COUNTRIES LESS SIMILAR MARKETS DISTANT MARKETS CULTURAL DISTANCE 31 / 28 BUMT 3850 Chapter 5&6 Notes -- 11
Slide 32 The Impact of Entry Barriers Entry barriers: any obstacle making it more difficult for a firm to enter a product/service market. The non-exporting modes of entry basically represent alternatives for the firm when entry barriers to a foreign market are high. These entry barriers involve not only artificial barriers such as tariffs (customs), but also involve lack of knowledge of the foreign market and a need to outsource the marketing to local firms with greater understanding of the market. Slide 33 The Impact of Entry Barriers 32 / 28 When barriers are low, the firm will be likely to enter via exporting. When barriers are high, alternative modes of entry have to be chosen: o License a local producer o Create a joint venture o Engage in a distribution alliance o Invest in a wholly owned subsidiary There are all difference types of entry barriers: Tariff barriers: Customs duties enforced on imported products (final products or intermediate products) Different tariff rates for different countries and different products May be adjusted by political influence from trade associations Non-Tariff Barriers Include all other entry barriers E.g. transportation costs, slow customs procedures, etc. Artificial Entry Barriers Limited distribution access Bureaucratic inertia Government regulations Limited access to technology Local monopolies Natural Entry Barriers Intense competition among several differentiated brands Strong brand names charging a premium price over generic competitors Pro-domestic sentiment favoring local brands The Impact of Entry Barriers When barriers are low, the firm will be likely to enter via exporting. When barriers are high, alternative modes of entry have to be chosen: License a local producer Create a joint venture Engage in a distribution alliance Invest in a wholly owned subsidiary 33 / 28 BUMT 3850 Chapter 5&6 Notes -- 12
Slide 34 The Internationalization Stages Internationalization Stages Stage 1 Indirect exporting, licensing Stage 2 Direct exporter, via independent distributor Stage 3 Establishing foreign sales subsidiary Stage 4 Local assembly Stage 5 Foreign production Born Globals Firms that form the outset view of the world as one market Typically small technology-based businesses Slide 35 34 / 28 Export Expansion Strategies The Internationalization Stages Internationalization Stages o Stage 1 Indirect exporting, licensing o Stage 2 Direct exporter, via independent distributor o Stage 3 Establishing foreign sales subsidiary o Stage 4 Local assembly o Stage 5 Foreign production Born Globals o Firms that form the outset view of the world as one market o Typically small technology-based businesses Firms can choose to enter gradually into one or two markets or simultaneously into several markets at once. When firms choose to enter gradually we call this a Waterfall Strategy. Waterfall Strategy o The firm gradually moves into overseas markets Advantages of this strategy are that expansion can take place in an orderly manner and it is relatively less demanding in terms of resource requirements Disadvantage of this strategy: it may be too slow in fast-moving market 35 / 28 Slide 36 The Waterfall Gradual Expansion Home Country Other country markets 36 / 28 BUMT 3850 Chapter 5&6 Notes -- 13
Slide 37 Export Expansion Strategies When firms try to enter several country markets simultaneously or within a limited period of time we call this a Sprinkler Strategy. Sprinkler Strategy o The firm tries to enter several country markets simultaneously or within a limited period of time Advantages of this strategy are that it is a much quicker way to market penetration across the globe and it generates first-mover advantages Disadvantage of this strategy is the amount of managerial, financial, and other resources required. 37 / 28 Slide 38 The Sprinkler Simultaneous Expansion Home Country Other country markets 38 / 28 Slide 39 The four main entry modes are: Exporting Licensing Strategic alliances Wholly Owned Manufacturing Subsidiary The four main entry modes are: Exporting Licensing Strategic alliances Wholly Owned Manufacturing Subsidiary 39 / 28 BUMT 3850 Chapter 5&6 Notes -- 14
Slide 40 Barriers to entry include: tariffs, quotas, customs procedures restrictive government regulations limited access to distribution channels pro-domestic consumer biases Barriers to entry include: tariffs, quotas, customs procedures restrictive government regulations limited access to distribution channels pro-domestic consumer biases 40 / 28 Slide 41 Export operations involve activities that are new to a domestic marketer. Many of these activities force the firm to either develop new skills or the typical case rely on independent middlemen. The firm can let its agent & distributor handle the local marketing, or it can establish a foreign sales subsidiary. Export operations involve activities that are new to a domestic marketer. Many of these activities force the firm to either develop new skills or the typical case rely on independent middlemen. The firm can let its agent & distributor handle the local marketing, or it can establish a foreign sales subsidiary. 41 / 28 Slide 42 In the past, foreign expansion started with culturally similar countries leveraging existing know-how in similar markets. Now, with a higher commitment to international markets, we observe firms that are born global. These firms sell abroad from the start. In the past, foreign expansion started with culturally similar countries leveraging existing know-how in similar markets. Now, with a higher commitment to international markets, we observe firms that are born global. These firms sell abroad from the start. 42 / 28 BUMT 3850 Chapter 5&6 Notes -- 15
Slide 43 When rapid entry into several countries is important, firms follow a sprinkler strategy, entering countries simultaneously. Past patterns followed a less risky but slower waterfall strategy where firms gradually expand from country to country. When rapid entry into several countries is important, firms follow a sprinkler strategy, entering countries simultaneously. Past patterns followed a less risky but slower waterfall strategy where firms gradually expand from country to country. 43 / 28 Slide 44 Trade barriers will typically force the firm to unbundle its value chain & engage in non-exporting modes of entry, such as licensing or strategic alliances or invest in a wholly-owned manufacturing subsidiary. Slide 45 Licensing & strategic alliances may dilute firm specific advantages through transfer of know-how, but the need for partners with local knowledge and the need to reduce a firm s risk exposure offsets this. Slide 46 A global marketer needs good interpersonal skills to work effectively with foreign partners, local subsidiary managers, & licensing/alliance partners who may be competitors in some product markets. 44 / 28 45 / 28 46 / 28 Slide 47 The optimal mode of entry is to find a way over entry barriers, then to make trade-offs between strategic posture and the product/market situation. Slide 48 Controlling the local marketing effort: o By establishing a sales subsidiary in the market country, the firm can control the local marketing effort quite independent of which particular mode entry mode has been chosen. Slide 49 End of Chapter 5 & 6 47 / 28 48 / 28 49 / 28 BUMT 3850 Chapter 5&6 Notes -- 16