Strategies for Analyzing and Entering Foreign Markets
After studying this chapter, students should be able to: > Discuss how firms go about analyzing foreign markets. > Outline the process by which firms choose their mode of entry into a foreign market. > Describe forms of exporting and the types of intermediaries available to assist firms in exporting their goods. > Identify the basic issues in international licensing and discuss the advantages and disadvantages of licensing. > Identify the basic issues in international franchising and discuss the advantages and disadvantages of franchising. > Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business. > Characterize the greenfield strategies and acquisition as forms of FDI. LECTURE OUTLINE OPENING CASE: Heineken Brews Up a Global Strategy The opening case explores Heineken NV’s global strategy. In particular, it considers the strategic moves and selection of entry modes Heineken is making in the U.S. and Europe to increase its competitiveness. Key Points • Heineken NV, the world’s second largest beer producer, earns more than 85 percent of its revenues outside of the Netherlands. The company is a market leader in every European country, and sells its beer in North and South America, Africa, and Asia. • Heineken began exporting beer to the U.S. in 1914, temporarily halted its sales during Prohibition, and successfully reestablished sales after Prohibition. Heineken’s distributor in the U.S. was Van Munching & Company.
Heineken has bought breweries in several European countries as a way of expanding its product lines and facilitating distribution throughout Europe. Students can be asked to compare and contrast Budweiser’s strategy in Britain with Heineken’s strategy in the U. the Netherlands.S. it decided to maintain its current export strategy because it believes the imported image Heineken beer carries is an important selling point in the U. Miller and Anheuser-Busch. Heineken earns the majority of its revenues outside of its home country. to cut costs and increase profits.S. Heineken brews beer in more than 50 countries.? The U. marketing campaigns with its global ones. distributor.S. however. 2.S. Issues to consider include whether Budweiser should establish a British brewery or form a joint venture with a local company.S.S. local production might make sense. CHAPTER SUMMARY
. Later. the company has closed or modernized older breweries. Why is it so important for Heineken to maintain its export sales to the U. it had to expand outside of its home country. In addition. Heineken continued its global expansion in order to capitalize on its distinctive competencies. The move also enables Heineken to coordinate its U. • Heineken’s current strategy is to achieve in Europe the same sort of market dominance Anheuser-Busch has in the U.S. Heineken knows that from a cost standpoint. Heineken recently acquired the distributor. yet both Anheuser-Busch and Miller sell 95 percent of their output locally.. Case Questions 1. and how Heineken should respond to Budweiser’s recent success in Britain. on the other hand. Van Munching & Company. What factors could explain this difference? Most students will quickly point out that if Heineken wanted to be one of the world’s major producers of beer. Although Heineken considered establishing a brewery in the U. its bottling technology. but notes that Lowenbrau actually saw a decrease in sales after establishing a U. Van Munching & Company.S.170 > Chapter 11
• Today. because its local market is so small. and its global distribution networks. had the luxury of producing beer in one of the world’s larger markets. whether exporting is a sustainable strategy. • Heineken has avoided establishing a brewery in the U. Much of its current appeal to the British appears to be related to the fact that it is imported. To that end. because it wants to retain its imported image. The company expanded into the soft drink and wine businesses in the 1970s to exploit its bottling technology and global distribution networks. and thus could rely on domestic sales for most of their earnings. has been an important export market for Heineken for nearly a century.S. Budweiser is one of the hot (or should one say cold?) beers of choice in Britain. Additional Case Application Today.S. that has been responsible for importing and distributing its products in the U. bought its U.S. from the beginning. operation. to cut costs. • Heineken has. however.
The text provides specific examples of how these factors affected the international strategies of various firms. firms must assess alternative markets. Sociocultural influences should also be considered when assessing foreign market opportunities. benefits. (See Chapter 10's closing case. • Levels of Competition. Next. Students should refer to Building Global Skills in Chapter 2 for a list of publications that provide this type of information. • Information on some of the factors is easily obtainable from published sources in the firm’s home country. Trade barriers. In fact. firms will attempt to minimize the potential impact of sociocultural differences by initially focusing on countries that are culturally similar to their home markets. legal and political issues will impact both entry methods and the repatriation of profits. Continual monitoring can help firms identify new opportunities. and then proceeds to discuss the advantages and disadvantages of each one. the legal and political environment. Students should refer to Chapters 6 and 8 for a review of these concepts. and select those that hold the most potential for entry or expansion. their relative market shares. and their relative strengths and weaknesses. In many cases. • Market Potential. It may be necessary for a firm to use proxy data in some cases. Discuss Table 11.1 here. The potential for growth in a particular market can be estimated using both objective and subjective measures. Other information may be subjective and difficult to obtain. Firms must also consider the current and future level of competition in foreign markets. The first step in foreign market selection is assessing market potential. Assessing Alternative Foreign Markets
• A firm must consider a variety of factors. The role of culture in international business was discussed in Chapter 9.) • Legal and Political Environment. per capita GDP. public infrastructure. levels of
competition. it may be necessary to visit the foreign location in question. and sociocultural influences when assessing alternative foreign markets. and ownership of goods such as automobiles and televisions. evaluate the respective costs. FOREIGN MARKET ANALYSIS To successfully increase foreign market share. for example. The chapter begins with the choice of entry modes.1 here.
. • Sociocultural Influences. The New Conquistador. I. and risks of entering each. their pricing and distribution strategies.Strategies for Analyzing and Entering Foreign Markets > 171
Chapter Eleven examines the various entry modes available to companies as they expand internationally. Variables a firm might wish to consider include population. Firms assessing their competitive environment should identify the number and size of firms already competing in the potential market. Show map 11. In some countries. including market potential. A country’s tax policies and government stability may also affect a firm’s strategy. GDP. might induce a firm to enter a market via FDI as opposed to exporting. It is important that a firm understand the host country’s policies toward trade as well as its general legal and political environment prior to making an investment. a firm must collect information relating to the specific product line under consideration.
access to new technology. licensing. and internalization factors. In contrast. Benefits. The text provides examples of both tangible (Inco. The nature of a firm’s ownership advantage will play a role in the firm’s selection of entry mode. and the opportunity to achieve synergy with other operations. competitive advantage. For example. but are uncertain as to the pros and cons of each method. the firm should evaluate sociocultural factors associated with its potential employees. and franchising. while a continued inability to reach the right strategic decisions may threaten the firm’s existence. foreclosing of markets to competitors. • Ownership advantages are the tangible or intangible resources owned by a firm that grant it a competitive advantage over industry rivals. Poor strategic judgments may rob a firm of profitable operations. A firm entering a new market incurs the risks of opportunity costs. Benefits from entering a foreign market include expected sales and profits. The theory considers three factors: ownership advantages. and direct financial loss due to misassessment of market potential.172 > Chapter 11
Depending on the proposed type of internationalization effort. • Benefits. Students can usually quickly name the various choices. • Risks. Direct costs are incurred when entering the foreign market in question and include costs associated with setting up a business operation. the availability of resources. • It is important that firms carefully assess foreign markets prior to making strategic decisions. joint ventures. transferring managers to run it. help a firm decide between exporting. the sociocultural factors of most importance are those that relate to consumers. II. Show Figure 11. The profits it would have earned in the second market are opportunity costs. war or terrorism. if a firm is considering establishing a factory or distribution center in a foreign country. which in addition to other factors such as the firm’s need for control. and the firm’s global strategy. if the proposed strategy is to export goods to a new market. Evaluating Costs. location advantages. additional operating complexity. A firm incurs opportunity costs when entering one market precludes or delays its entry into another. lower acquisition and manufacturing costs. There are two types of relevant costs at this point: direct and opportunity. Teaching Note: Instructors may want to begin their discussion of entry methods by asking students how a hypothetical (or real) firm should sell its product in other markets.
. Ltd’s nickel-bearing ore) and intangible (the luxury appeal of LVMH Moet Hennessy Louis Vuitton’s products) ownership advantages. In some extreme cases a firm may also risk loss due to government seizure of property. certain sociocultural variables may be more important than others.1 here. FDI. and shipping equipment and merchandise. CHOOSING A MODE OF ENTRY
Dunning’s eclectic theory (see Chapter 5) can be helpful in providing insight as to the best means of penetrating foreign markets. and Risks
and government restrictions.2 here. logistical requirements.Strategies for Analyzing and Entering Foreign Markets > 173
Location advantages are those factors that affect the desirability of host country production relative to home country production. contract manufacturing. or they are seeking higher profit margins. If transaction costs are low. Discuss Table 11. the choice of an entry mode will be a tradeoff between risk and reward. in fact. • There are many advantages to exporting. or production lines are running below capacity. after two years of negotiation landed a deal to export its products to Japan. the firm may select FDI or a joint venture as an entry method. III. • Firms may have a proactive motivation for entering a foreign market. the availability of resources.2 here. It allows a firm to control its financial exposure in the host country. gain experience in operating internationally.
. political risk. capacity in existing plants. In sum. • Internalization advantages are factors that affect the desirability of a firm producing a good or service itself rather than relying on an existing local firm to handle production. The deal required changes in recipes and packaging. The choice of home country versus host country production is affected by factors such as relative wage rates. • Other factors that affect a firm’s choice of entry method include its need for control. customer needs. and in effect be pulled into the market as a result of the opportunities available there. The text provides several examples of firms that have exported as a result of a proactive motivation. the level of resource commitment necessary. • Firms may also export as a result of a reactive motivation whereby they are pushed into exporting because domestic opportunities are shrinking. The text illustrates this concept with an example of the factors affecting choice of entry mode in the pharmaceutical industry. as well as the creation of a new brand name. Present Map 11. and the firm’s overall global strategy. or the process of sending goods or services from one country to other countries for use or sale there (see Chapter 1). EXPORTING TO FOREIGN MARKETS
The most common international business activity is exporting. or licensing may be a better choice. Exporting also allows a firm to enter a market on a gradual basis. land acquisition costs. in most situations the risk is limited to basic start-up costs and the value of the goods or services involved in the transaction. a UK firm producing fruit preserves. and obtain information about certain markets without any investment expense. and the level of control the firm seeks. access to R&D facilities. the administrative costs of managing a foreign subsidiary. If transaction costs are high. Transaction costs (see Chapter 3) will play a role in this decision. franchising. Discuss Venturing Abroad: Jumping on a Japanese Jam Deal Chivers Hartley.
Additional Considerations In additional to considering which form of exporting to use. logistics. Because indirect exporting is usually not done on a conscious basis. and the need for quick feedback may also affect a firm’s choice of entry method. • Direct exporting involves sales to customers located outside the firm’s home country. • Logistical Considerations. which in turn exports the product.S.
Indirect exporting occurs when a firm sells its products to a domestic customer. and the topic will also be discussed in more depth in Chapter 17. The text illustrates this concept with the example of how voluntary export restraints on Japanese automobile exports encourage Japanese producers to manufacture in the U. A firm must consider the logistical costs of exporting such as the physical distribution costs of warehousing. tariff and nontariff barriers may discourage firms from selecting exporting as an entry mode. • Marketing concerns including image. and other forms of home country subsidization encourage exporting. packaging.S. and the selection of the distributor can be critical to the firm’s international success. In addition. transporting and distributing goods. export financing programs. in either its original form or a modified form. the firm may find that its business judgment differs from the distributor’s. Intracorporate transfer has become more important as the sizes of MNCs have increased. The text provides several examples of products. compensation decisions must be made. Discuss Figure 11. and distribution issues. and pricing strategies may differ. and today represents some 35 percent of all U. and intracorporate transfer. responsiveness to the customer. subsequent efforts are usually the result of a deliberate effort. distribution. the best distributor may already be handling a competitor’s products and a firm will be forced to weigh the costs of using a less experienced distributor with the costs of using a distributor that will not handle its products on an exclusive basis. marketing considerations. • Distribution issues may also influence a firm’s decision to export. which are successful as exports because of their image. the process does not provide the firm with experience in international business and does not allow the firm to capitalize on potential export profits. logistical considerations. Export Intermediaries
. direct exporting. The text provides several examples of intracorporate transfer. However. allowing a firm to gain valuable international business experience. In some cases.
Government policies such as export promotion policies.174 > Chapter 11
Forms of Exporting There are three forms of exporting: indirect exporting. Many firms are forced to use distributors in foreign markets. • An intracorporate transfer is the selling of goods by a firm in one country to an affiliated firm in another. merchandise exports and imports. and inventory carrying costs when selecting an entry mode.2 here. a firm must also assess government policies. Although one-third of firms exporting for the first time are responding to an unsolicited order.
a third party specializing in the facilitation of exports and imports. IV. Webb-Pomerene associations. Second. The text provides an example of why the Kirin Brewery company chose licensing as a means of international expansion. the licensee. and freight forwarders specialize in the physical transportation of goods. in return for a fee. they are able to continuously obtain information about economic conditions and business opportunities anywhere in the world.. Some EMCs act as commission agents.Strategies for Analyzing and Entering Foreign Markets > 175
A firm may market and distribute its goods via an intermediary. providing market research. restrictions on the repatriation of profits. Teaching Note: Instructors may wish to raise the issue of why intellectual property protection is so important to firms. in cases where tariff and nontariff barriers. The success of the sogo soshas is a result of several factors. freight consolidation. Fewer than 25 associations exist today. and other services for members. Unlike an EMC. Show Figure 11. antitrust laws. • A Webb-Pomerene association is a group of U. Japan’s sogo sosha are the most important trading companies in the world. an international trading company participates in both exporting and importing. providing clients with information about the legal.) Discuss Table 11. Manufacturers’ agents solicit domestic orders for foreign manufacturers while manufacturers’ export agents act as an export department for domestic manufacturers. or investment obligations. managerial. Basic Issues in International Licensing
. • Other Intermediaries. • An international trading company is a firm directly engaged in trading a wide variety of goods for its own account. However. 3 here. overseas promotional activities. First. licensing may be the only option. INTERNATIONAL LICENSING
Licensing is an arrangement whereby a firm. or restrictions on FDI discourage other alternatives.S. the licensor. and international trading companies. they have a ready source of financing from the keiretsu. and a built-in source of customers (fellow keiretsu members.S.3 here. Instructors may wish to use the example of Polaroid and Kodak to illustrate the concept. financial.
An export management company (EMC) is a firm that acts as its client’s export department. Firms operating in countries with weak intellectual property protection are not advised to use licensing. while others take title to the good. sells the rights to use its intellectual property to another firm.S. Several thousand EMCs operate in the U. and because it allows a firm to capitalize on location advantages of foreign production without incurring any ownership. contract negotiations. firms that operate within the same basic industry and that are allowed by law to coordinate their export activities without fear of violating U. There are several types of export intermediaries including export management companies. and why it is difficult to enforce. Finally. • Licensing is attractive because it requires few out-of-pocket costs. export and import brokers bring together international buyers and sellers of standardized commodities. and logistical details of exporting.
Typically. that the licensees that built Tokyo Disneyland required a 100-year agreement with Walt Disney Company. Finally. In addition. Royalties of 3-5 percent are common. yet incur relatively little R&D cost. for example. • A primary disadvantage of licensing is that it limits market opportunities for both the licensee and the licensor. Finally. The first step in negotiating a licensing contract is specifying the boundaries of the agreement. and Constraints.176 > Chapter 11
The actual licensing agreement is a critical part of the licensing process. licensees are prohibited from divulging information learned from the licensor to third parties. Advantages and Disadvantages of International Licensing • A primary advantage of licensing is its relatively low financial risk. and constraints. The contract should consider the boundaries of the agreement. are required to keep specific records on the sale of products or services. firms must carefully word their licensing agreements to minimize problems and misunderstandings. The text provides an example of how Pepsi sets the boundaries in its licensing agreement with Heineken. rights. and costly and tedious litigation to resolve disputes may hurt both parties. Licensors who have chosen licensing as a lowcost means of gaining information about a foreign market may seek a short-term agreement. • Specifying the Agreement’s Duration. a licensee will seek an agreement that is long enough for it to recoup its investments in market research. privileges. The text notes. there is mutual dependence between the licensor and the licensee. • Establishing Rights. and must follow specified standards regarding product and service quality. and duration of the contract. and/or production facilities. a licensing agreement specifies the duration of the arrangement. and reflects the bargaining power and skills of the licensor and licensee. and also guard against creating a future competitor. However.
Specifying the Agreement’s Boundaries. the establishment of distribution networks. The licensor wants to receive as much compensation as possible. In addition. while the licensee wants to pay as little as possible. Licensees benefit from the arrangement by being able to make and sell products with a proven track record. compensation. dispute resolution. A licensing contract should spell out the rights and privileges of the licensee and the constraints the licensor may impose. licensing permits a company to investigate foreign market sales potential without making significant investment in financial and managerial resources. Compensation under a licensing agreement is called a royalty. Privileges. Both parties have an interest but opposing views in the determination of an agreement’s compensation. • Determining Compensation.
It uses e-mail to give advice and guidance.
VI. and there are foreign investors who are interested in entering into franchise agreements. and operating procedures. and provides overall real time support to its franchisees. and operating procedures of the franchisor. to operate a business under the name of another.S. helps with web design and online training. Ramada. and non-U. reporting. relies heavily on the Internet to manage its operations. Discuss Wiring the World: Advice from Afar Cendant Corporation. • A formal contract is associated with franchise agreements. firms that have been successful at franchising. formulas. under a franchise contract.
INTERNATIONAL FRANCHISING A franchising agreement allows an independent entrepreneur or organization. than in other countries.S. the franchisor has been successful domestically because of unique products and advantageous operating systems. The text provides an example of some of the problems McDonald’s had with a franchisee in Moscow. Franchising is one of the fastest growing forms of international business today. Advantages and Disadvantages of International Franchising • Primary advantages of international franchising are that it allows franchisees to enter a business with a proven track record.Strategies for Analyzing and Entering Foreign Markets > 177
V. In addition. • U. the franchisor agrees to help the franchisee establish the new business. called the franchisor. in return for a fee. and Super 8. called the franchisee. Usually. Howard Johnson. Travelodge. and allows franchisors to expand internationally at relatively low cost and risk. the factors that contributed to its domestic success are transferable to foreign locations.
SPECIALIZED ENTRY MODES FOR INTERNATIONAL BUSINESS
. • As with licensing. firms are the leaders in the international franchise business. The Internet has allowed Cendant to improve the quality while lowering the cost of its services. a primary disadvantage of franchising is that profits are shared between the franchisor and the franchisee. A typical contract specifies the fee and royalties paid by the franchisee for the rights to use the name. the franchisee typically agrees to adhere to the franchisor’s requirements for appearance.S. Basic Issues in International Franchising • International franchising is more likely to succeed when the franchisor has already achieved considerable success in franchising in its domestic market.S. International franchising may also be more complex than domestic franchising. The text provides examples of U. The text illustrates this concept by examining the franchise agreements of McDonald’s. trademarks. Franchisors also have the opportunity to obtain information about local markets that they might otherwise have difficulty acquiring. perhaps because franchising is more common in the U. a hotel franchising company that controls such brands as Days Inn.
• FDI is attractive not only for its profit potential. FDI is riskier and more complex than other types of entry strategies. and
. government actions discourage FDI (through direct controls on foreign capital or repatriation of profits). operates it. For example. but also because a firm has increased control over its foreign operations. FDI is also attractive if host country customers prefer to deal with local factories. In many cases. and later invest in facilities in the host country. In some cases. Management contracts are attractive because they allow firms to earn additional revenues without incurring investment risks or obligations. it hired the former owners to manage the firm. The text provides an example of such a project involving the country of Gabon. The greenfield strategy is attractive because the firm can select the site that meets its needs best. government actions encourage firms to invest in local operations (through such policies as the availability of political risk insurance). management contracts are arranged as a result of government activities.178 > Chapter 11
Firms may also use specialized entry modes such as contract manufacturing. and later transfers ownership of the project to another party. acquisitions strategies (also known as "brownfield strategies"). and joint ventures. the firm starts with a clean slate. while others prefer to use one of the other entry methods initially. FOREIGN DIRECT INVESTMENT • Some firms choose to establish operations in a host country at the beginning of their internationalization effort. the text notes that when Saudi Arabia nationalized Aramco. VII. technical expertise. The text notes that both Nike and Mega Toys use contract manufacturing in the production of their goods. The text illustrates this concept with an example of Hilton Hotel’s management contracts. In some cases. and launching the new operation. hiring and/or transferring managers and employees. • However. The text provides an example of the latter concept by exploring PepsiCo’s operations in the former Soviet Union. whereby a firm buys existing assets in a foreign country. complex. construct.
Contract Manufacturing is used by firms that outsource most or all of their manufacturing needs to other companies in an effort to reduce the amount of resources needed in the physical production of their products. or specialized services to a second firm for some agreed-upon time in return for a fee. • Some firms today are using a B-O-T project in which the firm builds a facility. • The three basic methods of FDI are greenfield strategies. and turnkey projects. and equip a facility and then turn the project over to the purchaser when it is ready for operation. multiyear projects such as the construction of a nuclear power plant or airport. • A management contract is an agreement whereby one firm provides managerial assistance. • A turnkey project is a contract under which a firm agrees to fully design. Control is important to firms because it allows firms to closely coordinate the activities of its foreign subsidiaries to achieve strategic synergies. turnkey projects are used when firms fear difficulties in procuring resources locally. while in other cases. whereby a firm builds new facilities. International turnkey projects typically involve large. management contracts. and because control may be necessary to fully exploit the economic potential of an ownership advantage. • A greenfield strategy involves starting from scratch: buying or leasing and constructing new facilities.
and so forth. Joint ventures will be explored in more depth in Chapter Twelve. The charts can then be used as reference material when discussing future topics. and distribution networks.
. when and where each mode is most appropriate. employees. a greenfield strategy allows a firm to spread its investment over an extended period of time. their advantages and disadvantages. and government policies. • Acquisition strategies (or brownfield strategies) are popular because. Discuss Bringing the World into Focus: A Bubbly Business When Plantagenet. telecommunications. unlike other entry methods. the purchasing firm must also spend substantial sums up front. the fact that land in the desired location is not available. and Komomklijke PTT Netherland. The main disadvantage of an acquisition strategy is that the purchaser assumes all liabilities of the acquired firm. and the firm may be perceived as a foreign enterprise.. Teaching Note: Instructors may wish to create a “master chart” of the different entry modes. based in San Francisco. the firm must recruit and train a local workforce. brand names. In contrast. The main disadvantages of the greenfield strategy include the time and patience necessary for successful implementations.
The joint venture involves an arrangement whereby a new enterprise is created by two or more firms working together for mutual benefit. The text provides an example of the difficulties Disney had with some of these issues when it opened its European operations. however they now make their international deals through a company incorporated in Luxembourg. technology.Strategies for Analyzing and Entering Foreign Markets > 179
the firm can acclimate itself to the new national business culture at its own pace. in part because of rapid changes in technology. In addition. Eventually the problems were worked out. so that students can easily compare the various options for entering a new market. The text provides examples of several recent acquisitions made by firms including Proctor and Gamble. an acquisition quickly gives the purchaser control over the firm’s factories. Joint venture creation is on the rise. they became embroiled in a variety of legal problems and tax issues. tried to buy a French champagne maker. local and national regulations must be complied with during the building of the new factory. or is only available at an unreasonable price. Arabia Oil Co.
• In 2000 Ricardo.
CL OS IN G CA SE
. the strategy to build it quickly and then get out seems appropriate. Key Points • Ricardo. based online auction company. Students will consider that Ricardo's founders originally intended to create an online publishing business and should demonstrate an understanding of how strategies change (sometimes radically) over time. that Ricardo's founders were interested in building the business and then selling it.com businesses. Unlike many dot.180 > Chapter 11
reference material when discussing future topics.S. If that is true.de grew through the establishments of strategic alliances with key firms throughout Europe and through the publicity gained by auctioning off high-profile items such as visits to the submerged Titanic and Steffi Graf's tennis racket. Given the large numbers of dot. There is not a "right" answer. It appears. Case Questions 1.
Ricardo. Goliath The case describes the success of Ricardo. however.com success depends largely on name recognition.de was established by three young German entrepreneurs in 1997. Why did Ricardo.de strive to grow quickly? Do you agree with this strategy? Should it have grown more slowly? Dot. The speed with which they moved created legal and financial problems.de. eBay has been profitable for quite some time.
• eBay. Given eBay's success in used and collectible items. students will probably suggest that Ricardo's founders might have been more successful if they had not limited the firm in this manner. What advice would you have given them? Would you have done anything differently? This question allows students a lot of latitude. 2. Had the business grown more slowly it might not have attracted QXL's eye and Ricardo's founders may have had a harder time finding a partner interested in acquiring the firm. a German online auction company in establishing itself despite eBay's dominance in the field. Another key issue is the decision to sell only new items. began in 1995 and went public in 1997. Turn back the clock to 1997.de was acquired by the British firm QXL (Britain's largest online auctioneer) for QXL stock worth $261 million. the U.de establish itself quickly.com start-ups in the late 90's it was important that Ricardo. Suppose you were hired by Ricardo's founders to map out an entry strategy for the firm.
As noted in the case. direct exporting. it could be argued that Ricardo's focus on new merchandise helps enhance buyers' confidence in the goods purchased. and intracorporate transfer. a firm must confront issues relating to ownership advantages.
1. and the firm’s global strategy.S. firms in the global marketplace. There are three forms of exporting: indirect exporting. Do you agree with Ricardo's decision to be acquired by QXL? It all depends on the objectives of the owners. Given the difficulties that e-commerce firms have faced recently. which attracts additional buyers and sellers alike. What advantages does a combined Ricardo-QXL have over eBay? A key advantage of Ricardo-QXL is their European emphasis. The fact that Ricardo-QXL is a European alternative to a U. eBay seems to have almost abandoned Europe and allowed Ricardo to establish a strong presence in Germany. for example) there is a backlash against the dominance of U. location advantages. but other firms are pulled into exporting because of foreign market opportunities. internalization advantages. Also. in many countries (like France. is the process of sending goods or services from one country to other countries for use or sale there. students will tend to say it was a good decision. firm will give it an advantage with some customers. 4. the availability of resources. Finally. their decision to be acquired seems even more prudent. What advantages does eBay possess over upstart competitors like Ricardo? eBay has tremendous name recognition and a solid reputation. To the extent that it netted $261 million for three years of work. (2) evaluating respective costs. benefits.Strategies for Analyzing and Entering Foreign Markets > 181
3. 2. (3) selecting those that hold the most potential for entry or expansion. What are some of the basic issues a firm must confront when choosing an entry mode for a new foreign market? When choosing an entry mode for a new foreign market. 3. What are the steps in conducting a foreign market analysis? A market analysis usually is comprised of three steps: (1) assessing alternative markets.S. and. It also has a huge variety of products being sold. the most common form of international business activity. and risks of entering each. 5. What is exporting? Why has it increased so dramatically in recent years? Exporting.
C H A P T E R R E VI E W
. Many firms are pushed into exporting because of shrinking domestic marketplaces. the need for control.
direct exporting. sells the right to use its intellectual property to another firm. Licensees like the arrangements because they are able to make and sell products with proven success tracks. What is an export intermediary? What is its role? What are the various types of export intermediaries? An export intermediary is a third party that specializes in facilitating imports and exports. 7. and freight forwarders handle the physical transportation of goods. Exporting allows a firm to expand into a foreign market gradually. licensors must be careful to avoid creating a future competitor. the Webb-Pomerene association. the licensor. There are various types of export intermediaries. there is potential for problems and misunderstandings. and export and import brokers. vulnerability to trade barriers. Indirect exporting involves selling a product to a domestic customer. while a manufacturer’s export agent acts as an export department for domestic manufacturers. the agreements limit market opportunities for both the licensor and the licensee. An international trading company trades a variety of goods for its own account. 5. What is international licensing? What are its advantages and disadvantages? International licensing occurs when a firm. manufacturer’s agents. the licensee.182 > Chapter 11
4. international trading companies. Direct exporting involves selling directly to distributors or end-users in other markets. Further. The primary advantages of international licensing are its relatively low financial risk and the opportunity it provides the licensor to learn about sales potential in foreign markets. Export intermediaries are third parties that specialize in facilitating trade. Finally. The role of an export intermediary can range from simply handling transportation and documentation to taking ownership of foreign-bound goods and/or assuming total responsibility for marketing or financing exports. acting on a commission basis. What are the primary advantages and disadvantages of exporting? One of the primary advantages of exporting is its relatively low level of financial exposure. A manufacturer’s agent. Export and import brokers bring together buyers and sellers of standardized commodities. However. A second advantage of exporting is related to speed of entry. including export management companies. There are several types of export intermediaries. yet incur low R&D costs. contract negotiations. The disadvantages of exporting include a lack of presence in the local marketplace. and intracorporate transfer. solicits domestic orders for foreign manufacturers. and potential problems with trade intermediaries. 6. What are the three forms of exporting? The three forms of exporting are indirect exporting. and therefore allows a company to assess the local environment and adapt its products to local consumers.
. and other services for its members. freight consolidation. An export management company is a firm that acts as the client’s export department. overseas promotion. Intracorporate transfer occurs when a company sells its product to a foreign affiliate. while a Webb-Pomerene association handles market research. and there is mutual dependency between the two parties. which then exports the product in its original form or a modified form.
technical expertise. they can obtain critical information about the local marketplace from franchisees. embassy staff. mangers will not be able to obtain all of the information needed to make a decision about a foreign market from secondary sources. or. and the firm can adapt to its new surroundings at its own pace. Do you think it is possible for someone to make a decision about entering a particular foreign market without having visited that market? Why or why not? The response to this question probably depends in part on the market in question and the degree of risk one is willing to assume. International franchising agreements are attractive because they allow franchisees to enter a business that is established and has a proven track record. managers have two options: they can visit the market in person and obtain information directly from local experts. However.
. Acquisitions. turnkey projects. one firm provides managerial assistance. What is international franchising? What are its advantages and disadvantages? International franchising involves an agreement whereby the franchisee operates a business under the name of the franchisor in return for a fee. acquisitions. and contract manufacturing. However. It is attractive because its allows a firm to select the most suitable site for construction. construct. an international franchising agreement requires both parties to share profits and may be more complicated than domestic franchisee agreements. and joint ventures. and equip a facility and then turn the key over to the purchaser when it is ready for operation. Typically. 9. Contract manufacturing involves outsourcing manufacturing needs to other companies.Strategies for Analyzing and Entering Foreign Markets > 183
8. What is FDI? What are its three basic forms? What are the relative advantages and disadvantages of each? FDI is foreign direct investment. or specialized services to a second firm in exchange for a fee. greenfield investments take time and patience. and spend substantial money up front. However. In addition. and may result in a firm being perceived as a foreigner. may be expensive. in contrast. and chamber of commerce officials. Joint ventures involve the creation of a new firm by two or more companies working together for mutual benefit. Thus. 10. require the firm to comply with local regulations and recruit a workforce. Questions for Discussion 1. Franchisors benefit from the agreements because they can expand internationally at relatively low cost and risk. allow a firm to generate profits even as it integrates the new company into its overall strategy. A turnkey project is an agreement whereby a firm agrees to fully design. and how do they work? Three specialized entry modes for international business are management contracts. The three basic forms of FDI are greenfield investments. acquisition requires a firm to assume all of the acquired firm’s liabilities. What are three specialized entry modes for international business. Under a management contract agreement. hire consulting firms to provide the necessary information. Greenfield investments involve the construction of new facilities. the firm starts with a clean slate.
For example. Ownership advantages affect a firm’s decision regarding entry mode in that certain types of advantages are more easily transferred through certain modes than others. How difficult or easy do you think it is for managers to gauge the costs. However. and internalization advantages. there is a fair amount of subjectivity involved regardless of the market in question. managers must estimate not only the costs involved in establishing a foreign operation. and gain experience in the market. and therefore the outcome of entry mode negotiations. 3. but also opportunity costs.
. 4. it is probably easier to gauge the costs. future benefits and risks must be estimated. benefits. Firms facing high tariff or nontariff barriers may find host country production preferable to home country production. a firm will probably choose exporting as an entry mode. 5.184 > Chapter 11
2. perhaps because of low wage rates. when transaction costs are low. the higher transportation costs associated with exporting. For example. In addition. and risks of developed country markets than it is to gauge the same variables in a developing economy. and distribution issues. location advantages. How does each advantage in Dunning’s eclectic theory specifically affect a firm’s decision regarding entry mode? Dunning’s eclectic theory considers three factors: ownership advantages. firms that face difficulty finding appropriate distributors may turn to one of the other entry modes. logistical issues. and the longer supply channel and difficulty communicating with customers may encourage a firm to choose an alternative entry method. the firm may use licensing as an entry mode. ownership advantages will affect a firm’s bargaining power. What specific factors could cause a firm to reject exporting as an entry mode? There are several factors which could cause firms to reject exporting as an entry mode. and the firm believes that it can farm out production without jeopardizing its interests. Location advantages affect a firm’s decision regarding entry mode because they affect the desirability of host country production relative to home country production. Why is exporting the most popular initial entry mode? Exporting is the most popular initial entry mode because of its simplicity and its low risk relative to other types of entry modes. including the presence of trade barriers. benefits. Exporting also allows a firm to enter a foreign market on a gradual basis. Exporting typically requires little or no capital investment. and the dollar amount of risk is limited to the value of a particular transaction. For example. Finally. Finally. For example. if home country production is more desirable. Logistical considerations may also affect the desirability of exporting. imbedded technologies are best transferred through equity modes. internalization advantages affect a firm’s decision regarding entry mode because they affect the desirability of producing a good or service in-house versus farming it out to another firm. and risks of a particular foreign market? In general. In addition. while simple technology is more suited to a licensing mode. For example.
a larger firm that has an in-house export department might engage a freight forwarder on a product-by-product basis. and the affiliate firm must have the capacity necessary to produce the product in question. or even
. and create a situation of mutual dependency. firms that are facing time constraints should probably select an alternative option. start with a clean slate. Depending on the particular circumstances of a firm. 7. and then resell them in both domestic and foreign markets. the firm would face a risk of problems and misunderstandings related to the agreement. In addition. Do you think trading companies like Japan’s sogo sosha will ever become common in the United States? Why or why not? Sogo soshas acquire goods either by importing them or having them produced. 10. However. what
Export intermediaries are third parties that specialize in the facilitation of trade. if the licensee violated the licensing agreement.S. 8.S.Strategies for Analyzing and Entering Foreign Markets > 185
6. characteristics would you look for? In selecting an export intermediary. Third. 9. What conditions must exist for an intracorporation transfer to be cost-effective? An intracorporate transfer occurs when one firm sells goods to an affiliate in another country. the licensing firm could face costly and time-consuming litigation. However. It is attractive to firms because it allows them to select the site that is most appropriate for their needs. because successful implementation takes time and patience. a small firm may select an export management company because it will essentially act as the firm’s export department. First. for an intracorporate transfer to be cost-effective. and in part because the close relationships with other firms that the sogo soshas imply go against the individualistic culture of the U. Finally. Your firm is about to begin exporting. Other students. employing certain types of intermediaries is more appropriate than employing others. in part because of antitrust laws in effect. it must be cheaper to buy the product in question from the affiliate firm than from an alternative source. Firms engage in intracorporate transfers to lower their production costs and use their facilities more effectively. such an arrangement would limit the market opportunities for the firm. which could affect the speed of entry into the foreign market. firms using this method of expansion may find that the desired location is too expensive. and acclimate to the local environment at a gradual pace. Second. For example. What factors could cause you to reject an offer from a potential licensee to make and market your firm’s products in a foreign market? There are several reasons why a firm might reject the offer of a potential licensee to make and market the firm’s product in a foreign market. and suggest that a form of sogo sosha is already common in the U. Therefore. Most students will probably agree that sogo soshas will never become common in the United States. Under what conditions should a firm consider a greenfield strategy for FDI? An acquisition strategy? A greenfield strategy involves setting up an operation from scratch. that provide many of the same services as a sogo sosha. however. may point to export trading companies in the U.S. the firm may be concerned that if it licensed its proprietary information it may create a future competitor. while the buying firm does not.
students will probably identify other beer companies that could use this approach. greenfield investment is probably not appropriate in cases where it is important for a firm to be perceived as a local firm. acting as owners of a chain of computer accessory stores. its deep pockets. Under an acquisition strategy. In addition to certain consumer products. Students should be assigned to groups for this exercise because it requires that groups exchange lists of companies that could or could not use the Heineken approach to international expansion. Firms that would find this approach difficult include auto producers. that workforces must be hired and trained. are asked to consider possible countries for international expansion. first by testing a market and then learning about it before actually investing in it.
Essence of the exercise This exercise is designed to allow students to become experienced with using the Internet to assess foreign markets. Students. and that various governmental regulations must be complied with. Students should also recognize that successful global companies such as Heineken might achieve their success in a very methodical manner. This strategy makes sense when the purchaser needs to generate revenues from its expansion immediately. a distribution system in place. What does this exercise teach you about international business? Students should recognize from this exercise that an international strategy that works well for some companies might not be effective for other companies. as well as trained employees. Through acquisition. steel producers. and the presence of local producers in most markets. including its international experience. its ability to enter a market on a gradual basis. 2. a firm acquires an existing firm doing business in a foreign country. This strategy would not make sense for a company that is short of capital since it requires substantial sums up front.
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Essence of the exercise This exercise begins with a description of Heineken’s global strategy. In addition. Finally. students should recognize that firms might use a variety
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unavailable. brand names. Answers to the follow-up questions. and technology. 1. a purchasing firm has an immediate market presence. and then asks students to identify other products or brands that could or could not use Heineken’s strategy for entering markets. and clothing producers. What are the specific factors that enable Heineken to use the approach described and simultaneously make it difficult for some other firms to copy it? What types of firms are most and least likely to be able to use this approach? Students will probably identify several factors that enable Heineken to use its three-step approach to foreign market expansion.
through the exchange of lists (steps 3 and 4 of the exercise). and the problem of finding a good joint venture partner. Other Applications Heineken follows a very precise strategy of expanding into new markets. students should recognize that not all managers think alike. and suggest alternative strategies. then licensing. the potential of creating a future competitor and/or the potential loss of quality if a firm engages in a licensing agreement. Finally.
. Instructors should play the role of a devil’s advocate. Students can debate the merits of the particular strategy it follows (exporting. then investing directly). bringing up issues such as the importance of speed in entering a new market.Strategies for Analyzing and Entering Foreign Markets > 187
of modes to enter a foreign market.