Chapter 3

Chapter 3. Entering Foreign Markets. 1. GSCM Tariku Jabana AAUSC 2019.

Chapter Objectives. Upon completion of this chapter, students need to understand factors that need to be considered in selecting foreign market entry modes differentiate the different modes of foreign markets entry.

3.1 Introduction. A firm expanding internationally must decide: which markets to enter when to enter them how to enter them (the choice of entry mode).

Refers to prioritizing which countries to enter..

With regard to the timing of entry, two options are often pursued:.

The advantages associated with entering a market early are called first mover advantages, and include:.

Disadvantages associated with entering a foreign market before other international businesses are referred to as first mover disadvantages known as pioneering costs..

3.4 Foreign Market Entry Modes. The appropriateness of particular modes of entry varies both among firms and for any individual firm across markets and time. The following are different modes of entry into new foreign markets :.

Exporting Licensing Franchising Joint Ventures Wholly Owned Subsidiaries (Foreign Direct Investment).

Exporting: It is selling of domestically produced goods in foreign markets. A company may have content with filling overseas orders that comes in without any serious selling effort on its part. Agents and brokers may act as go-between for companies at this stage of international..

Licensing It is selling of rights/ granting of permission to market brand name products or use patented processes or copyright materials. The licensor licenses a foreign company to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty. Whereas licensing is a strategy pursued primarily by manufacturing companies, franchising, which resembles licensing in some respects, is a strategy employed chiefly by service companies..

Franchises Is a special type of license in which a company sells a package that contains a trademark, equipment, material, and managerial guidelines..

Joint Venture It is the establishment of a firm that is jointly owned by two or more otherwise independent firms. Joint venture is a contractual partnership between two or more separate business entities to pursue a business opportunity together. The partners in an equity joint venture each contribute capital and resources in exchange for an equity stake and share in any resulting profits. (In a nonequity joint venture, there is no contribution of capital to form a new entity.) A joint venture may be the only way to enter certain countries where, by law, foreigners cannot own a business. In other situations, joint ventures let companies pool technological knowledge share the expense and risk of research that may not produce marketable goods..

Wholly owned subsidiary /FDI Is one in which 100% of the subsidiary’s stock is owned by the parent company. To establish a wholly owned subsidiary in a foreign market, a company can either set up a completely new operation in that country or acquire an established host country company and use it to promote its products in the host market..

There are different kinds of FDI. The two most commonly used, however, are are increasingly applicable to global firms. Greenfield and Brownfield.

Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores. These new facilities are built from scratch—usually in an area where no previous facilities existed..

Brownfield FDI (Acquisition) is when a company or government entity purchases or leases existing production facilities to launch a new production activity..

Entry Mode Exporting Advantages Ability to realize location and scale economies Disadvantages High transport costs Problems with local marketing agents Trade barriers Franchising Licensing Low development costs and risks Inability to realize location and scale economies Inability to engage in global strategic coordination Lack of control over technology Inability to engage in global strategic coordination Low development costs Lack of control over quality.

Entry Mode Joint Venture Advantages Access to local partner’s knowledge Disadvantages Inability to engage in global strategic coordination Wholly Owned Subsidiaries Protection of technology Inability to realize location and scale economies Lack of control over technology. Shared development costs and risks High costs and risks Ability to engage in global strategic coordination Ability to realize location and scale economies.

Choice of Entry Modes. The optimal choice of entry mode involves trade-offs. The factors we should consider in choosing appropriate mode include: Our core competencies/ source of competitive advantage; Technological know-how, Management know-how, and Pressure for cost reduction..

Technological know-how Licensing Management know-how Franchise Joint venture.

Source of competitive advantage A firm with a competitive advantage based on proprietary technological know-how should licensing and joint venture arrangements could not avoid the risk of losing control over the technology, hence may not be viable options..

The competitive advantage of many service firms is based upon management know-how. The risk of losing control over the management skills to franchisees or joint venture partners is not high, and the benefits from getting greater use of brand names are significant..

Pressure for cost reduction The greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries. This will allow it to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution..

3.5 The Global Business Strategies. A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm. Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions pressures to be locally responsive.

Pressures for cost reductions Pressure for cost reduction is greatest in industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon when major competitors are based in low cost locations where there is persistent excess capacity where consumers are powerful and face low switching costs.

Pressure for local responsiveness Pressures for local responsiveness arise from: differences in consumer tastes and preferences differences in traditional practices and infrastructure differences in distribution channels host government demands.

Depending on the strength of pressures for cost reductions and for local responsiveness, companies typical make a choice among four main strategic postures when competing internationally: a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy..

Figure below illustrates the conditions under which each of these strategies is most appropriate..

Global standardization strategy Transnational strategy International strategy Localization strategy.

GSCM Tariku Jabana AAUSC 2019. 31. Strategy Advantages Disadvantages Global Exploit experience curve effects Exploit location economies Lack of local responsiveness International Transfer distinctive competencies to foreign markets Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects Multi-domestic Customize product offerings and marketing in accordance with local responsiveness Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Transnational Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning Difficult to implement due to organizational problems.

Global Standardization Strategy In this strategy, a firm takes its existing products and sells them in other countries without making changes to the product. A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. The strategic goal is to pursue a low-cost strategy on a global scale. This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal..

Under this strategy, products are much more likely to be standardized rather than tailored to local markets. One way to think about global strategies is that if the world is flat, you can sell the same products and services in the same way in every country on the planet. The strategic business units operating in each country are assumed to be interdependent, and the home office attempts to achieve integration across these businesses. Therefore, a global strategy emphasizes economies of scale and offers greater opportunities to utilize innovations developed at the corporate level or in one country in other markets..

The advantages of this strategy are that the company doesn’t need to invest in new research, development, or manufacturing. Changes may be made in packaging and labeling, but these are driven by local regulatory requirements. The disadvantages, however, are that its products may not be well suited to local needs..

Localization (Multi-domestic) Strategy This strategy is about product adaptation that means modifying the company’s existing product in a way that makes it fit better with local needs. It focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets..

For example, mobile-phone maker Nokia uses local designers to create mobile-phone handset models that are specifically appropriate for each country. Consequently, the handsets designed in India are dust resistant and have a built-in flashlight. The models designed in China have a touch-screen, stylish, and Chinese character recognition..

Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense..

The disadvantage of a multi-domestic strategy, is that the firm faces more uncertainty because of the tailored strategies in different countries. In addition, because the firm is pursuing different strategies in different locations, it cannot take advantage of economies of scale that could help decrease costs for the firm overall..

Transnational Strategy A transnational strategy tries to simultaneously: achieve low costs through location economies, economies of scale, and learning effects. differentiate the product offering across geographic markets to account for local differences. foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations..

Transnational strategy seeks to combine the best of multi-domestic strategy and a global strategy to get both global efficiency and local responsiveness. For many industries, given the differences across markets and the similarities being fostered by the flatteners, this form of strategy is highly desirable and appropriate. The difficulty is that combining the multi-domestic and global strategies is hard to do because it requires fulfilling the dual goals of flexibility and coordination. Firms must balance opposing local and global goals. On the positive side, firms that effectively implement a transnational strategy often outperform competitors who use either the multi-domestic or global corporate-level strategies..

A transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness..

International Strategy An international strategy involves taking products first produced for the domestic market and then selling them internationally with no or only minimal local customization. When there are low cost pressures and low pressures for local responsiveness, an international strategy is appropriate..

An international strategy may not be viable in the long term. To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors. Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strategy..

Chapter Summary. A firm expanding internationally must decide which markets to enter, when to enter them and on what scale, and how to enter them (the choice of entry mode) Before entering to new foreign markets, a company needs to understand the needs of the new international market through due diligence process, recognize regional differences within a country of the new international market, and understand industry dynamics. The choice between different foreign markets is based on an assessment of their long run profit potential affected by several factors. Firms need to weigh the first mover advantages and disadvantages in determining the timing of entering into a foreign market..

Exporting is one of the methods that organizations can use to enter foreign markets. In this entry method, products produced in one country are marketed in another country through marketing and distribution channels. In a wholly owned subsidiary, the firm owns 100 percent of the stock. Another name of wholly owned subsidiary is Foreign Direct Investment (FDI). Foreign direct investment (FDI) refers to an investment in or the acquisition of foreign assets with the intent to control and manage them. FDI is primarily a long-term strategy. The optimal choice of entry mode involves trade-offs. Core competencies, technological know-how, management know-how, and pressure for cost reduction are some of the factors we should consider in choosing appropriate mode..