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Chapter 1 Instructor Shan A. Garib, Winter 2013

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Overview:

Int’l trade provides opportunities for companies to be profitable and successful

Moving to new markets can be risky and expensive

Successful companies plan their market entry strategies carefully

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Introduction to Market Entry Strategies:

Successful companies plan their market entry strategies carefully

◦ WHERE: to enter based on demand for product/service, costs, taxes, regulatory, economic and sociopolitical environments

◦ WHEN: timing is crucial

◦ HOW: mode and method of market entry important

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Market Entry Methods:

The many methods of entry can be classifies into two groups:

◦ TRADING STRATEGIES Indirect Direct

◦ INVESTING STRATEGIES Transfer Related Foreign Direct Investment Related

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Market Entry Methods:

TRADING ENTRY STRATEGIES: •Selling to foreign market

Indirect - marketing to domestic/foreign intermediary buyer eg. Fiat uses Chrysler > E-Commerce

Direct – marketing to foreign buyer eg. Toyota > E-Commerce

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Market Entry Methods:

INVESTING ENTRY STRATEGIES:•Conducting business in a foreign market

Transfer Related – transfer of property or using the property of another company

•Licensing – foreign company manufactures product for domestic company in return for payment

•Franchising – foreign company conducts business under a trademarked name in return for payment

•Contract Manufacturing – company outsources work to a foreign company

•Strategic Alliances – partnership formed with foreign company for business in foreign market

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Licensor and the licensee Benefits:

◦ Appealing to small companies that lack resources◦ Faster access to the market◦ Rapid penetration of the global markets

Caveats:◦ Other entry mode choices may be affected◦ Licensee may not be committed◦ Lack of enthusiasm on the part of a licensee◦ Biggest danger is the risk of opportunism◦ Licensee may become a future competitor

Strategic Planning for Market EntryStrategic Planning for Market Entry

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Franchisor and the franchisee

Master franchising Benefits:

◦ Overseas expansion with a minimum investment

◦ Franchisees’ profits tied to their efforts

◦ Availability of local franchisees’ knowledge

CaveatsCaveats::– Revenues may not be adequateRevenues may not be adequate– Availability of a master Availability of a master

franchiseefranchisee– Limited franchising Limited franchising

opportunities overseasopportunities overseas– Lack of control over the Lack of control over the

franchisees’ operationsfranchisees’ operations– Problem in performance Problem in performance

standardsstandards– Cultural problemsCultural problems– Physical proximityPhysical proximity

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Benefits:◦ Labor cost advantages◦ Savings via taxation, lower energy costs, raw

materials, and overheads◦ Lower political and economic risk◦ Quicker access to markets

Caveats:◦ Contract manufacturer may become a future

competitor◦ Lower productivity standards◦ Backlash from the company’s home-market

employees regarding HR and labor issues◦ Issues of quality and production standards

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Market Entry Methods:

INVESTING ENTRY STRATEGIES:•Conducting business in a foreign market

Foreign Direct Investment Related – acquiring property, assets, projects or other companies

•Branch Office – opening office in target market to conduct business

•Joint Ventures – partnership with foreign company to form a legally separate organization

•Greenfield – market entry through building production sites or facilities there

•M&A – company joins with another company in target market to create a new company

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Qualities of an ideal subcontractor:◦ Flexible/geared toward just-in-time delivery◦ Able to meet quality standards◦ Solid financial footings◦ Able to integrate with company’s business◦ Must have contingency plans

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Cooperative joint venture Equity joint venture Benefits:

◦ Higher rate of return and more control over the operations

◦ Creation of synergy◦ Sharing of resources◦ Access to distribution network◦ Contact with local suppliers and government

officials

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JV Caveats:◦ Lack of control◦ Lack of trust◦ Conflicts arising over matters such as strategies,

resource allocation, transfer pricing, ownership of critical assets like technologies and brand names

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Drivers Behind Successful International Joint Ventures:

◦ Pick the right partner◦ Establish clear objectives from the beginning◦ Bridge cultural gaps◦ Gain top managerial commitment and respect◦ Use incremental approach◦ Create a launch team during the launch phase:◦ (1) Build and maintain strategic alignment◦ (2) Create a governance system◦ (3) Manage the economic interdependencies◦ (4) Build the organization for the joint venture

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Greenfield Operations Benefits:

◦ Greater control and higher profits◦ Strong commitment to the local market on the

part of companies◦ Allows the investor to manage and control

marketing, production, and sourcing decisions

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Greenfield Operations Caveats:

◦ Risks of full ownership◦ Developing a foreign presence without the support

of a third part◦ Risk of nationalization◦ Issues of cultural and economic sovereignty of the

host country

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Greenfield Operations Acquisitions and Mergers

◦ Quick access to the local market◦ Good way to get access to the local brands

Greenfield Operations◦ Offer the company more flexibility than

acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology.

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Identify reasons for the company to expand or move into international trade and assessing the company’s resources, abilities and product and service in order to make decisions –

Enables Company’s to:◦ take action!◦ ID problems, & costs

The Strategic Planning ProcessThe Strategic Planning Process

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STEP ONE:◦ Ask…

What are our Strategic objectives

How capable are we of meeting these objectives

What are our strengths and weaknesses

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What are our Strategic objectives?◦Max profits for shareholders◦Increase market share Tolerate ST losses

◦Max cash flow Option for companies with poor cash flow eg. Dump old stock overseas

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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What are our Strategic objectives?◦Reposition the business Opportunity to develop or extend product lines in new market Effective if brand is already well established

◦Acquire resources Way to acquire new knowledge, skills or technologies

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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How capable are we of meeting these objectives?

◦ Determine whether company has resources, skills and capabilities to meet objectives

Analyze the company and it’s external environment….

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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Analyze the company and it’s external environment….particularly:

Product or Service Offering Suitability for international market

ASK:Does it have a unique selling point or competitive advantageDoes it have limited appealWill it be in demand for a whileWill it be difficult to transportWill its sale be restricted

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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Knowledge:What is the company’s level of knowledge with international trade?

More knowledge = less unanticipated problems and costs Knowledge of regulations on import/export Market conditions to select the most appropriate market and determine

pricing and marketing strategies

Resources:What is required to enter a new market?

Human resources, larger production facilities or financing Skill set to handle customs clearance and insurance coverage

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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Resources: What is required to enter a new market?

eg. Capabilities Needed-Market Research of target market, cultural preferences-Production and process R&D for modifications, larger plant and equipment-Marketing an sales force to address target market-Distribution and delivery order fulfillment to target market -Financing source -HR skill set language, negotiation

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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What are our strengths and weaknesses?◦ Links internal and external threats

INTERNAL > StrengthsINTERNAL > Weaknesseg. Costs, skills budget

EXTERNAL > OpportunityEXTERNAL > Threateg. Social, demographic, technological

STEP ONE:The Strategic Planning ProcessThe Strategic Planning Process

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STEP TWO:◦ Identify Potential Markets

Select based on strategic objectives Max Profit: significant potential sales volume

customers are affluent opportunity to price discriminate

Gain Market Share: market growing/unfamiliar with market market has few competitors

Improve Cash Flow: market relatively undeveloped appreciation for foreign goods market contains pockets of wealth

The Strategic Planning ProcessThe Strategic Planning Process

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◦ Identify Potential Markets Select based on strategic objectives

Reposition business: unfamiliarity means no prejudice opportunity to experiment in market

Acquire Resources: market contains resources/skills needed to meet objectives

STEP TWO:The Strategic Planning ProcessThe Strategic Planning Process

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◦ Identify Potential Markets Narrow options down by considering:

Size of market that can be reached easily - limited by cultural, demographic, geographic factors Political situation - unstable = risk Economic climate - stronger economy > more purchased Market culture/lifestyle - eg. Names of products offensive

The Strategic Planning ProcessThe Strategic Planning ProcessSTEP TWO:

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◦ Researching Countries and Customers Use internet resources like CIA fact book for geo, demo,

eco, pol environment and trade organizations Use subscription databases eg. D&B Use Government websites eg. US Dept of Commerce Attend trade shows/fairs

STEP TWO:The Strategic Planning ProcessThe Strategic Planning Process

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◦ Consider Potential Issues Researching Competitive Market Entry Strategies

Analyze the industry with Michael Porter 5 forces to formulate a competitive strategy

1.Threat of New Entry or Barriers to Entry 2.Intensity of Rivalry – reduced profits3.Threat Posed by Substitute Products4.The Bargaining Power of Buyers – control the prices

suppliers pay -Less buyers = more buyer power

5.The Bargaining Power of Suppliers – powerful when they are concentrated - Pressure on buyers to pay more

STEP THREE:The Strategic Planning ProcessThe Strategic Planning Process

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◦ Researching Barriers to Entry Problems with distribution or transport Political and regulatory barriers eg export licence Problems with obtaining payments Costs like customs and tariffs and insurance

◦ Analyzing risks and Benefits Measure potential risks of course of action against benefits List all risks, benefits and impacts

Likelihood of risk vs. Impact on Company Likelihood of benefit vs. Impact on Company

STEP THREE:The Strategic Planning ProcessThe Strategic Planning Process

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◦ Create and Action Plan Decide which actions to be taken and when Decide which strategy will most likely succeed for their

given market List the steps that must be performed to put the strategy

in action Include strategies to mitigate key risks

STEP FOUR:The Strategic Planning ProcessThe Strategic Planning Process