9 Entry and Expansion Mode

International Business
8. Global Market Opportunity

Assessment
9. Entry and Expansion Mode
Oct 27, 2009 Dr. Basim Makhool 1

MOTIVATIONS TO GO ABROAD
• Overview of the major motivations:
– Proactive motivations represent stimuli for

firm-initiated strategic change.
– Reactive motivations describe stimuli that

result in a firm’s response and adaptation to
changes imposed by the outside environment.

• Proactive Motivations:
• Profits are the major proactive motivation for
international business.
– However, there is a large gap between
expectation and reality as the firm has not
previously engaged in international business.
• Unique products or a technological

advantage can provide a competitive edge.
– However, real and perceived advantages must
be differentiated.

• Proactive Motivations:
• Special knowledge about foreign
customers or market situations, e.g.
particular insights, special contacts and in-
depth research.
– However, it will rarely provide prolonged
motivation only if firms build up international
information advantage as an ongoing process
• Through tax benefits, firms can offer their
product at a lower cost in foreign markets or
can accumulate a higher profit.
– However, international trade rules make it
increasingly difficult for governments to use
tax subsidies to encourage exports.
• Reactive Motivations:
• Responding to competitive pressures
• An ideal outlet for overproduction
• Declining domestic sales related to goods

marketed domestically at the declining stage of their
product life cycle.
• Excess capacity

• Reactive Motivations:
• Proximity to customers and ports,
physically and psychologically
– Psychological distance
- Cultural variables, legal factors and other societal norms make a
foreign market that is geographically close seem psychologically
distant.
Two major issues:

First, some of the distance seen by firms is based on perception
rather than reality.
Second, closer psychological proximity does make it easier for
firms to enter markets

• Firms are the most successful in international

business are usually motivated by proactive, internal
factors.
– More service oriented than reactive firms
– More marketing and strategy oriented than reactive firms
– More likely to have solicited their first international order,

whereas reactive firms frequently begin international
activities after receiving an unsolicited order from abroad

STRATEGIC EFFECTS OF GOING INTERNATIONAL
• New environments, new problems:

– Consisting of strategic considerations, such as
service delivery and compliance with government
regulations.
• Preparedness for internationalization:

– Assessing strengths and weaknesses in the
context of the globalization
– It will affect the competitive position and strategic
options available to the firm

STRATEGIC EFFECTS OF GOING INTERNATIONAL
• Profit and risk during early internationalization:

– In the short term, rising risk accompanied by decreasing profitability.
– In the longer term, increasing familiarity with international
markets and the diversification benefits of serving multiple markets
will decrease the firm’s risk and increase profitability.
• Satisfactory performance can be achieved in three ways:

– Effectiveness - the acquisition of market share abroad and increased
sales
– Efficiency - rising profitability
– Competitive strength - the firm’s position compared to other firms in
the industry

Global Market Opportunity
A favorable combination of circumstances, locations,

or timing that offer prospects for exporting, investing,
sourcing, or partnering in foreign markets.
Opportunities include:
– marketing products and services;
– establishing factories or other production facilities
to make offerings more competently or cost-
effectively;
– procuring raw materials or components, services
of lower cost or superior quality;
– Entering into collaborative arrangements with
foreign partners.

The Six Tasks of GMOA
1. Conduct an internal assessment of readiness to

initiate international business activity.
2. Assess suitability of products and services for
foreign markets.
3. Systematically identify the best markets to target
with the chosen product(s) or service(s).
4. Estimate industry market potential, or the “market
demand”, for the product(s) or service(s) in the
selected target markets.
5. Screen and select qualified business partners, such
as distributors or suppliers.
6. Estimate company sales potential for each target
market.

Task 1. Organizational Readiness
Objective: To provide an objective assessment of

the company’s preparedness to engage in
international business activity.
Outcomes: A list of firm strengths and weaknesses,
regarding international business, and
recommendations for resolving deficiencies that
hinder achieving company goals.
Criteria: Relevant financial and tangible resources;
relevant skills and competencies; senior
management commitment and motivation

Issues to be Resolved in
Organizational Readiness Analysis
• What does the firm hope to gain from international
business? E.g., increasing sales or profits,
challenging competitors in their home markets,
pursuing a global strategy, etc.
• Is international business expansion consistent with
other company goals, now or in the future?
• What demands will internationalization place on
company resources, such as management,
personnel, finance, production and marketing
capacity? How will such demands be met?

Task 2. Product Suitability
Objective: To conduct a systematic assessment of the suitability of

the firm's products and services for international customers; To
evaluate the degree of the fit between the product or service and
customer needs.
Outcomes: Determination of factors that may hinder product or
service market potential in each target market; Identification of
needs for the adaptations that may be required to initial and
ongoing market entry.
Criteria: Assess the firm’s products and services with regard to:
– foreign customer characteristics and requirements
– government regulations
– expectations of channel intermediaries
– characteristics of competitors’ offerings

Product Suitability
• Sell well in the domestic market. E.g., Microsoft

Xbox, Iphone
• Cater to universal needs. E.g., cancer drug,
energy efficient refridgerator
• Address a need not well served in particular
foreign markets. E.g., mutual fund, home
mortgage
• Address a new or emergent need abroad. E.g.,
major earthquake creates urgent need for
portable housing; AIDS in Africa creates need for
drugs and medical supplies.
Task 3. Country Screening
Objective: To reduce the number of countries that
warrant in-depth investigation as potential target
markets to a manageable few.
Outcomes: Identification of 5 or 6 of the highest
potential country markets.
Criteria: Market size and growth rate; market intensity
(that is, buying power of the residents in terms of
income level); consumption capacity (that is, size and
growth rate of the country’s middle class); country’s
receptivity to imports; infrastructure appropriate for
doing business; economic freedom; political risk.

Specific Considerations
• Cultural Similarity with Target Market may

Matter. Some firms target countries that are
“psychically” similar in terms of language and
culture.
• Nature of Information Sought varies with
product/industry. E.g., for farming equipment,
consider countries with much agricultural land
and farmers with higher incomes.
• Targeting a Region may Make Sense. E.g.,
European Union, Latin America

Criteria Relevant to
Country Screening for FDI
• Long-term growth prospects
• Cost of doing business. Potential attractiveness of
the country based on the cost and availability of
commercial infrastructure, tax rates and wages,
access to high-level skills and capital markets
• Country risk. Regulatory, financial, political, and
cultural barriers and the legal environment for
intellectual-property protection
• Competitive environment. Intensity of competition
from local and foreign firms
• Government incentives. Availability of tax holidays,
subsidized training costs, grants, or low-interest
loans.

A.T. Kearney’s Offshore Location
Attractiveness Index
• Assists managers understand and compare the factors
that make countries attractive as potential locations for
offshoring of service activities such as IT, business
processes and call centers. Evaluates countries on 39
criteria categorized into three dimensions:
• Financial structure accounts for cost of labor,
infrastructure costs (for electricity and telecom systems),
and tax and regulatory costs.
• People skills and availability accounts for supplier’s
experience and skills, labor force availability, education
and linguistic proficiency, and employee attrition rates.
• Business environment assesses economic and political
aspects of the country, commercial infrastructure,
cultural adaptability, and security of intellectual property.

Task 4. Industry Market Potential
Analysis
Objective: To estimate the size of relevant
industry sales within each target country; To
investigate and evaluate any potential barriers
to market entry.
Outcomes: 3 to 5- year forecasts of industry
sales for each target market. Delineation of
market entry barriers in industry
Criteria: Market size, growth rate, and trends in
the industry; degree of competitive intensity;
tariff and non-tariff trade barriers; standards
and regulations; availability and sophistication
of local distribution; unique customer
requirements and preferences; industry-
specific market potential indicators.
Industry Market Potential
• Estimate of the likely sales that can be

expected for all firms in a particular industry
during a specific time period.
• Industry Market Potential is different from
company sales potential, which refers to the
share of industry sales the firm itself expects
during a specific period.
• Most companies forecast sales at least three
years into the future, of both industry
market potential and company sales
potential.

Indicators of Industry Market Potential
• Market size, growth rate, and trends in the specific

industry
• Tariff and non-tariff trade barriers to enter the market
• Standards and regulations that affect the industry
• Availability and sophistication of local distribution
• Unique customer requirements and preferences
• Industry-specific market potential indicators

Examples of Industry-Specific
Indicators
• Cameras: Examine climate-related factors
such as the average number of sunny days
in a typical year.
• Laboratory equipment: Examine

government expenditures on health care.
• Cooling equipment: Examine the number

of institutional buyers, such as restaurants
and hotels.
Practical Methods for Estimating Industry
Market Potential
• Simple Trend Analysis. Aggregate production for the industry as a whole, adding
imports from abroad and deducting exports.
• Monitoring Key Industry-Specific Indicators. Caterpillar, examines announced
construction projects, building permits, growth rate of households, and
infrastructure development.
• Monitoring Key Competitors. If Caterpillar is considering Chile as a potential
market, it investigates the current involvement in Chile of its number-one
competitor, the Japanese firm Komatsu.
• Following Key Customers. Automotive suppliers can anticipate where their
services will be needed next by monitoring the international expansion of their
customers such as Honda or Mercedes Benz.
• Tapping into Supplier Networks. Firms can gain valuable leads from current
suppliers by inquiring with them about competitor activities.
• Attending International Trade Fairs. Industry trade fairs and exhibitions are
excellent venues for obtaining valuable market information.

National Trade Data Bank
• Best Market Reports identify the top 10 country

markets for specific industry sectors.
• Country Commercial Guides analyze economic and
commercial environments of countries.
• Industry Sector Analysis reports analyze market
potential for sectors such as telecommunications.
• International Market Insight reports cover country
and product-specific topics, with various ideas for
approaching markets of interest.

Task 5. Foreign Partner Selection
Objectives: To decide on the type of foreign
business partner; clarify ideal partner
qualifications; and plan mode of entry.
Outcomes: Determination of most suitable types of
foreign business partners. List of attributes desired
of foreign business partners. Determination of
value-adding activities foreign business partner
contribute.
Criteria: Manufacturing and marketing expertise in
the industry; commitment to the international
venture; access to distribution channels in the
market; financial strength; quality of staff;
technical expertise; infrastructure & facilities.

Types of Foreign Business Partners
• Exporters tend to collaborate with foreign market

intermediaries, such as distributors and agents.
• Licensing partners are independent businesses that
apply intellectual property to produce products in
their own country.
• Franchising partners are franchisees –independent
businesses abroad that acquires rights and skills
from the focal firm to conduct local operations
• International collaborative venture, include joint
venture and strategic alliance partners.
• Others: global sourcing, contract
manufacturing, and basic suppliers.

Ideal Qualifications of Foreign Distributors
• Financially sound and resourceful
• Competent management
• Qualified technical and sales staff
• Willing and able to invest to grow the business
• Strong industry knowledge
• Access to distribution channels and end-users
• Known in the marketplace and well-connected
with local government
• Committed and loyal

Task 6. Estimate Company Sales Potential
Objective: To estimate the most likely share of

industry sales the company can achieve, over a
period of time, for each target market.
Outcomes: 3 to 5-year forecast of company sales in
each target market. Understanding of factors that
will influence company sales potential.
Criteria: Capabilities of partners; access to
distribution; competitive intensity; pricing and
financing; market penetration timetable of the
firm; risk tolerance of senior managers.

Company Sales Potential
• Company sales potential is an
estimate of the share of annual industry
sales that the firm expects to generate
in a particular target market during a
given time period.
• Requires obtaining highly refined
information from the market.
• Researcher must project the firm’s
revenues and expenses for 3-5 years
into the future; very challenging.
Factors That Determine Company Sales
Potential
• Partner capabilities. The competencies and resources of
foreign partners determine how quickly the firm can enter
and generate sales in the target market.
• Access to distribution channels. The ability to establish
and make best use of channel intermediaries and
distribution infrastructure in the target market.
• Intensity of the competitive environment. Local or third-
country competitors are likely to intensify their own
marketing efforts when confronted by new entrants.
• Pricing and financing of sales. The degree to which pricing
and financing are attractive to both customers and channel
members is critical to initial penetration.
• Human and financial resources. Such resources are a
major factor in determining the proficiency and speed with
which success can be achieved.

Factors Determining Company Sales Potential
(cont.)
• Market penetration timetable. Gradual entry gives the

firm time to develop and leverage appropriate
resources and strategies, but may cede some
advantages to competitors in getting established in the
market. Rapid entry may allow the firm to surpass
competitors and obtain first-mover advantages, but it
can tax the firm’s resources and capabilities.
• Risk tolerance of senior managers. Management’s
tolerance for risk in the market.
• Special links, contacts, capabilities of the firm. The
focal firm’s network in the market – its existing
relationships with customers, channel members, and
suppliers.
• Reputation. The firm can succeed faster in the market
if target customers are already familiar with its brand
name and reputation.

Practical Approaches to
Estimating Company Sales Potential
• Survey of end-users and intermediaries. The firm can
survey a sample of customers and distributors to identify
a potential market.
• Trade audits. Managers visit retail outlets and question
channel members to assess relative price levels of
competitors’ offerings and perceptions of competitor
strength. The trade audit can indicate opportunities for
new modes of distribution, identify types of alternative
outlets, and provide insights into relative competitive
strength.
• Competitor assessment. The firm may benchmark itself
against principal competitor(s) in the market and estimate
the level of sales it can potentially attract away from
them. What rival firms will have to be outperformed?
Even in those countries dominated by large firms research
may reveal market segments that are underserved or
ignored altogether.

Practical Approaches to
Estimating Company Sales Potential (cont.)
• Obtaining estimates from local partners.
Collaborators such as distributors, franchisees, or
licensees already experienced in the market are
often best positioned to develop estimates of
market share and sales potential.
• Limited marketing efforts to “test the waters.”
Some companies may choose to engage in a
limited entry in the foreign market – a sort of ‘test
market’ – as a way of gauging long-term sales
potential or gaining a better understanding of the
market. From these early results, it is possible to
forecast longer-term sales.

The Method of Analogy
• When using the analogy method, the researcher draws on

known statistics from one country to gain insights into the
same phenomenon for a similar country.
• If the researcher knows the total consumption of citrus
drinks in India then -- assuming that citrus drink
consumption patterns do not vary much in the
neighboring Pakistan – a rough estimate of Pakistan’s
consumption can be made, making an adjustment, of
course, for the difference in population.
• If the marketer of antibiotics knows from experience that
X number of bottles of antibiotics are sold in a country
with a Y number of physicians per thousand people, then
it can be assumed that the same ratio (of bottles per
1,000 physicians) will apply in a ‘similar’ country.

9.ENTRY AND EXPANSION
MODES

Basic Entry Decisions
Firms entering foreign markets make
three basic decisions:
1. which markets to enter
2. when to enter those markets
3. on what scale to enter those
markets

Which Foreign Markets?
• The choice of foreign markets will depend on
their long run profit potential
• Favorable markets are politically stable with
free market systems and relatively low inflation.
• Markets are also more attractive when the
product in question is not widely available and
satisfies an unmet need

Timing Of Entry
• Once attractive markets are identified, the
firm must consider the timing of entry
• Entry is early when the firm enters a foreign
market before other foreign firms
• Entry is late when the firm enters the
market after firms have already established
themselves in the market

Timing Of Entry
• First mover advantages are the advantages
associated with entering a market early
First mover advantages include:

• the ability to pre-empt rivals and capture demand
by establishing a strong brand name
• the ability to build up sales volume in that country
and ride down the experience curve ahead of rivals
and gain a cost advantage over later entrants
• the ability to create switching costs that tie
customers into products or services making it
difficult for later entrants to win business

Timing Of Entry
• First mover disadvantages are disadvantages associated with
entering a foreign market before other international businesses
First mover disadvantages include:

• pioneering costs - arise when the foreign business system is so
different from that in a firm’s home market that the firm must
devote considerable time, effort and expense to learning the
rules of the game
Pioneering costs include:

• the costs of business failure if the firm, due to its ignorance of
the foreign environment, makes some major mistakes
• the costs of promoting and establishing a product offering,
including the cost of educating customers

Choosing a Mode of Entry
Exporting/Importing
Decision Factors:
Ownership advantages International
Location advantages Licensing
Internalization advantages
Other factors International
Need for control Franchising
Resource availability
Global strategy Specialized Modes
Foreign Direct
Investment
Dr. Basim
Oct 27, 2009
Makhool 47
Decision factors that affect
choice of mode of entry
Ownership advantages are tangible or intangible resources
owned by a firm which grant it a competitive advantage over
its industry rivals.
Liability of foreignness reflects the informational, political,

and cultural disadvantages that foreign firms face when trying
to compete against local firms in the host country market.
Location advantages are those factors that affect the

desirability of host country production relative to home
country production.
Internalization advantages are those that make it

desirable for a firm to produce a good or service itself rather
than contracting with another firm to produce it.
The modes of entry are discussed on the following slides.
ENTRY AND DEVELOPMENT STRATEGIES
• Exporting and Importing:
● Indirect involvement through an intermediary and

does not deal with foreign customers or firms
● Direct involvement with foreign customers or markets
with the opportunity to develop a relationship.
– Transaction cost theory - firms will evaluate and

compare
the costs of integration internally and using an
external party
© John
Oct Wiley & Sons Ltd.
27, 2009 Dr. Basim Makhool 49
ENTRY AND DEVELOPMENT STRATEGIES
• Indirect vs. Direct:

● Indirect activities may not result in growing
management commitment to international markets or
increased capabilities in serving them.
●Direct exporters and importers learn more quickly the

competitive advantages of their products and can
therefore expand more rapidly.
– However, firms are faced with obstacles, include
identifying and targeting foreign suppliers and/or
customers and finding retail space, costly and time-
consuming processes.

Motivations for Exporting
Proactive: motivations are those that

pull a firm into foreign markets as a
result of opportunities available there
Reactive: motivations for exporting are
those that push a firm into foreign
markets, often because opportunities
are decreasing in the domestic market

Forms of Exporting
Indirect exporting: occurs when a firm sells its
product to a domestic customer, which in turn exports
the product, in either its original form or a modified
form .
Direct exporting: exporting occurs through sales to

customers—either distributors or end-users—located
outside the firm's home country.
Intra-corporate transfers: is the sale of goods by a

firm in one country to an affiliated firm in another. They
account for about 40 percent of all U.S. merchandise
exports and imports
Dr. Basim Makhool

Oct 27, 2009 52
Additional Considerations for Exporting
rnmental policies: Export promotion policies, export financing programs, and
s of home country subsidization encourage exporting as an entry mode.
ersely, host countries may impose tariffs and NTBs on imported goods,
by discouraging the firm from relying on exports as an entry mode
eting concerns: , such as image, distribution, and responsiveness to the custo

also affect the decision to export.
stical considerations: The firm must consider the physical distribution costs of
housing, packaging, transporting, and distributing its goods, as well as its invent
ng costs and those of its foreign customers.
ibution issues: . A firm experienced in exporting may choose to establish its

distribution networks in its key markets.
Oct 27, 2009 Dr. Basim Makhool

53
INTERNATIONAL EXPORT INTERMEDIARIES
• intermediaries, third parties that specialize in facilitating
trade . May offer limited services such as handling only
transportation and documentation. Or they may perform more
extensive roles, including taking ownership of foreign-bound
goods and/or assuming total responsibility for marketing and
financing exports.
• Reasons for utilizing trade intermediaries:
– Assist with troublesome yet important details such as

documentation, financing and transportation.
– Identify foreign suppliers and customers and help the firm
with long- or short-term market penetration efforts.
• Major types of international intermediaries are export

management companies and trading companies.
© John
INTERNATIONAL INTERMEDIARIES
• Trade intermediaries can be particularly helpful by:
– Knowing foreign market competitive conditions;

– Having personal contacts with potential foreign buyers;
– Evaluating credit risk associated with foreign buyers;
– Having sales staff to call on current foreign customers in
person;
– Assuming responsibility for physical delivery of product
to foreign buyer
© John
Types of Export
Intermediaries
1. Export management company
2. Webb-Pomerene association
3. International trading company
4. Other intermediaries

56
Export Management Companies
(EMCs)
– EMC is a firm that acts as its client's export department
– EMC specializes in performing international business
services as commission representatives or as
distributors.
– Two primary forms of operation:

First, taking title to goods and distribute internationally
on their own account.
Second, performing services as agents. Primarily
responsible for developing foreign business and sales
strategies and establishing contacts abroad.
© John
Webb-Pomerene Association
A Webb-Pomerene association is a
group of U.S. firms that operate within
the same industry and that are allowed
by law to coordinate their export
activities without fear of violating U.S.
antitrust laws.
Dr. Basim
Oct 27, 2009
Makhool 58
Trading Companies
– The general trading companies play a unique role
in world commerce by importing, exporting,
countertrading, investing and manufacturing.
– Their vast size allows them to benefit from
economies of scale and perform their operations
at high rates of return, even though their profit
margins are less than 2%.
● The most famous trading companies are the sogo

shosha of Japan.

Other Intermediaries
Manufacturers’ agents: solicit domestic orders for foreign
manufacturers, usually on a commission basis .
Manufacturers’ export agents: act as a foreign sales

department for domestic manufacturers, selling those firms'
goods in foreign markets.
Export and import brokers bring together international

buyers and sellers of such standardized commodities as
coffee, cocoa, and grains.
Freight forwarders specialize in the physical

transportation of goods, arranging customs documentation
and obtaining transportation services for their clients
Dr. Basim
Oct 27, 2009
Makhool 60
• Private Sector Facilitators:

● Facilitators assist in the process of going international by supplying
knowledge and information but do not participate in the transaction.
– The statements and actions of other firms in the same

industry.
– Distributors encourage domestic firms to participate in
the international market, both for exports and imports.
– Banks and other service firms, such as accounting and
consulting firms, can serve as major facilitators by
alerting their clients to international opportunities.

• Public Sector Facilitators:

– Government provides export assistance, e.g. the
Department of Commerce in the US
– Government organizations can also sponsor

meetings that bring interested parties together
and alert them to new business opportunities
abroad.
– In addition, state and local authorities,

educational institutions such as universities
and community colleges can also be major
international business facilitators.
© John
Licensing
Licensing is when a firm, called the licensor, leases the
right to use its intellectual property—technology, work
methods, patents, copyrights, brand names, or trademarks—
to another firm, called the licensee, in return for a fee.
As an entry strategy, it requires neither capital investment nor

detailed involvement with foreign customers.
Trademark licensing is a substantial source of worldwide

revenue for companies that can trade on well-known names and
characters
Dr. Basim
Oct 27, 2009
Makhool 63
The Licensing Process
Licensor leases the Licensee uses the

rights to use intellectual property
intellectual property to create products
$$$
Earns new revenues Pays a royalty
with low investment to licensor
Oct 27, 2009

Dr. Basim Makhool
64
Basic Issues in International Licensing
• Specifying the boundaries of the

agreement
• Determining compensation
• Establishing rights, privileges, and
constraints
• Specifying the duration of the contract
Oct 27, 2009

Dr. Basim Makhool 65
Licensing
Advantages Disadvantages
• Low financial risks • Limited market
• Low-cost way to opportunities/profit
assess market s
potential • Dependence on
• Avoid tariffs, NTBs, licensee
restrictions on • Potential conflicts
foreign investment
with licensee
• Licensee provides
knowledge of local • Possibility of
markets creating future
competitor

66
Franchising
A franchising, actually a special form of
licensing, is the granting of the right by a parent company (the
franchisor) to another, independent entity (the franchisee) to do
business in a prescribed manner , in return for a fee.
Involve a combination of selling the franchisor’s products or using its name,

production and marketing techniques etc.
The major forms of franchising are manufacturer-retailer

systems (such as car dealerships), manufacturer-wholesaler systems
(such as soft drink companies) and service-firm retailer systems (such
as lodging services and fast-food outlets).

67
Basic Issues in International
Franchising
• Does a differential advantage exist in
domestic market?
• Are these success factors
transferable to foreign locations?
• Has franchising been a successful
domestic strategy?

68
Franchising
• Low financial risks • Limited market
• Low-cost way to assess opportunities/profits
market potential • Dependence on
• Avoid tariffs, NTBs, franchisee
restrictions on foreign • Potential conflicts with
investment franchisee
• Maintain more control • Possibility of creating
than with licensing future competitor
• Franchisee provides
knowledge of local
market

69
Inter-Firm Co-Operation
• Inter-Firm Co-Operation:
– The formation of strategic alliances (or partnerships)
to achieve multiple goals, ranging from informal co-
operation to formal joint ownership of worldwide
operations.
• Reasons for Inter-Firm Co-Operation:

– Foreign market penetration
– Sharing the risk and resource requirements of an
activity in a particular market e.g. aerospace
– Blocking and co-opt competitors
© John
• Types of Inter-Firm
Co-operation:
– Informal co-operation –
partners work together
without a binding agreement
and the relationships are
based on mutual trust and
friendship.
© John
• Types of Inter-Firm Co-operation:
– Under Contractual agreements, partners may join
forces for joint R&D, joint marketing joint production.
- Contract manufacturing is used by firms, both large and

small, that outsource most or all of their manufacturing needs
to other companies. This strategy reduces the financial and
human resources firms need to devote to the physical
production of their products.
- Management contracts, contract is an agreement whereby

one firm provides managerial assistance, technical expertise,
or specialized services to a second firm for some agreed-upon
time in return for monetary compensation
© John
Contract Manufacturing
• Low financial risks • Reduced control
• Minimize resources (may affect
devoted to quality, delivery
manufacturing schedules, etc.)
• Focus firm’s • Reduce learning
resources on other potential
elements of the • Potential public
value chain relations problems
Dr. Basim
Oct 27, 2009
Makhool 73
Management Contracts
• Focus firm’s • Potential returns
resources on its limited by contract
expertise
area of contracts
• May unintentionally
• Minimal financial transfer proprietary
exposure knowledge and
techniques to
contractee
Dr. Basim
Oct 27, 2009
Makhool 74
Turnkey Projects
• Focus firm’s • Financial risks
resources on its – Cost overruns
area of expertise
• Construction
• Avoid all long- risks
term operational
– Delays
risks
– Problems with
suppliers
Dr. Basim
Oct 27, 2009
Makhool 75
Foreign Direct Investment
• High profit potential • High financial and
managerial
• Maintain control investments
over operations • Higher exposure to
• Acquire knowledge political risk
of local market • Vulnerability to
• Avoid tariffs and restrictions on
foreign investment
NTBs
• Greater
managerial
complexity
Dr. Basim
Oct 27, 2009
Makhool 76
Foreign Direct Investment
• Building new facilities (the greenfield
strategy)
• Buying existing assets in a foreign
country (acquisition strategy)
• Participating in a joint venture
(Equity Participation strategy)

77
Motives of Greenfield
Strategy
• Best site: a firm can select the site that best meets
its needs.
• Modern facilities: onstruct modern, up-to-date
facilities
• Economic development incentives: Local
communities often offer economic development
incentives to attract such facilities because they will
create new jobs; these incentives lower the firm's
costs
• Clean slate: comply with various local and national
regulations
Dr. Basim
Oct 27, 2009
Makhool 78
Equity Participation
• Equity Participation:
– Many multinational corporations have acquired minority

ownerships in companies that have strategic
importance.
• Reasons for equity ownership:

– Ensuring supplier ability and build formal and
informal working relationships.
– New market entry and support of global
operations
© John
• Joint Ventures:
– A joint venture can be defined as the long-term

participation of two or more companies in an enterprise in
which each party contributes assets, has some equity and
shares risk.
• Reasons for establishing a joint venture:

– Government policy or legislation;
– One partner’s needs for other partners’ skills;
– One partner’s needs for other partners’ attributes or
assets
© John
• Reasons for failure of a joint venture:
– Conflicts of interest
– Disclosure of sensitive information
– Disagreements over how profits are to be shared.
– Lack of communication before, during and after

formation of the venture.
© John
• Managerial Considerations:
– First, finding the right partner

– an orientation and goals in common, bringing
complementary and relevant benefits to the
endeavour.
– Second, the more formal the arrangement is,

the greater the care that needs to be taken in
negotiating the agreement.
© John
• Issues to be addressed before the

formation of the venture:
– Clear definition of the venture and its duration;

– Ownership, control and management;
– Financial structure and policies;
– Taxation and fiscal obligation;
– Employment and training;
– Production;
– Government assistance;
– Transfer of technology
© John
Full Ownership vs Equity Participation
• Full Ownership:
– Management may believe that no outside

entity should have an impact on corporate
decision making,
– Being based on financial concerns
– However, government action through outright

legal restrictions discriminatory actions make
option less attractive.

Strategic Alliances
A strategic alliance is a business
arrangement whereby two or more firms
choose to cooperate for their mutual benefit.
A joint venture (JV) is a special type of

strategic alliance in which two or more firms
join together to create a new business entity
that is legally separate and distinct from its
parents
Dr. Basim
Oct 27, 2009
Makhool 85
Benefits of Strategic Alliances
Potential Benefits
of Strategic Alliances
Shared Synergy
Ease of
Shared Knowledge and
Market
Risk and Competitive
Entry
Expertise Advantage
Dr. Basim
Oct 27, 2009
Makhool 86
The Scope of Strategic
Alliances
Dr. Basim
Oct 27, 2009
Makhool 87
Types of Functional Alliances
A production alliance: two or more firms each manufacture
products or provide services in a shared or common facility. A
production alliance may utilize a facility one partner already
owns.
A marketing alliance: two or more firms share marketing

services or expertise. In most cases, one partner introduces its
products or services into a market in which the other partner
already has a presence.
A financial alliance : alliance of firms that want to reduce the

financial risks associated with a project. Partners may share
equally in contributing financial resources to the project, or one
partner may contribute the bulk of the financing .
An R&D alliance, the partners agree to undertake joint

research to develop new products or services.
Dr. Basim
Oct 27, 2009
Makhool 88
Issues in the Implementation of
Strategic Alliances
Partner
selection
Form of Joint
ownership management
Dr. Basim
Oct 27, 2009
Makhool 89
Factors Affecting Partner
Selection
Nature of
Compatibility
partner services
Relative safeness Learning potential
Dr. Basim
Oct 27, 2009
Makhool 90
Approaches to Joint Management
Shared
management
agreements
Assigned
arrangements
Delegated
arrangements
Dr. Basim
Oct 27, 2009
Makhool 91
Pitfalls of Strategic
Alliances
Changing Incompatibility
circumstances of partners
Pitfalls
Loss of
Access to
autonomy
information
Distribution
of earnings
Dr. Basim
Oct 27, 2009
Makhool 92
A COMPREHENSIVE VIEW OF INTERNATIONAL EXPANSION

•Export
Strategy

Cost Pressures And Pressures
For Local Responsiveness
Firms that compete in the global marketplace typically
face two types of competitive pressures:
• pressures for cost reductions
• pressures to be locally responsive
• These pressures place conflicting demands on the firm

• Pressures for cost reductions force the firm to lower
unit costs, but pressure for local responsiveness
require the firm to adapt its product to meet local
demands in each market—a strategy that raises costs

Pressures for Cost Reductions and
Local Responsiveness

Pressures For Cost
Reductions
Pressures for cost reductions are 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

Pressures For Local
Responsiveness
Pressures for local responsiveness arise from:
• differences in consumer tastes and preferences -
strong pressures for local responsiveness emerge
when consumer tastes and preferences differ
significantly between countries
• differences in traditional practices and infrastructure
- pressures for local responsiveness emerge when
there are differences in infrastructure and/or
traditional practices between countries

Pressures For Local
Responsiveness
• differences in distribution channels - a
firm's marketing strategies needs to be
responsive to differences in distribution
channels between countries
• host government demands - economic
and political demands imposed by host
country governments may necessitate
a degree of local responsiveness

Choosing A Strategy
There are four basic strategies to compete in the
international environment:
• global standardization
• localization
• transnational
• International
• The appropriateness of each strategy depends on

the pressures for cost reduction and local
responsivness in the industry

Choosing A Strategy
Four Basic Strategies

Global Standardization
Strategy
• The 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
The global standardization strategy makes sense when:

• there are strong pressures for cost reductions
• demands for local responsiveness are minimal

Localization Strategy
• The localization strategy 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
The localization strategy makes sense when:

• there are substantial differences across nations
with regard to consumer tastes and preferences
• where cost pressures are not too intense

Transnational Strategy
The 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
The transnational strategy makes sense when:

• cost pressures are intense
• pressures for local responsiveness are intense

International Strategy
• The international strategy involves taking
products first produced for the domestic market
and then selling them internationally with only
minimal local customization
The international strategy makes sense when

• there are low cost pressures
• low pressures for local responsiveness

The Evolution of Strategy
• 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

The Evolution of Strategy
Changes in Strategy over Time

Home Work #8
• Due next Saturday
• Questions for discussion end of chapter 8

9 Entry and Expansion Mode

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

9 Entry and Expansion Mode

Загружено:

Авторское право:

Доступные форматы

International Business

8. Global Market Opportunity

Oct 27, 2009 Dr. Basim Makhool 1

• Overview of the major motivations:

– Proactive motivations represent stimuli for

– Reactive motivations describe stimuli that

Oct 27, 2009 Dr. Basim Makhool 2

• Unique products or a technological

Oct 27, 2009 Dr. Basim Makhool 3

• Responding to competitive pressures

• An ideal outlet for overproduction

• Declining domestic sales related to goods

Oct 27, 2009 Dr. Basim Makhool 5

Two major issues:

Oct 27, 2009 Dr. Basim Makhool 6

• Firms are the most successful in international

– More service oriented than reactive firms

– More marketing and strategy oriented than reactive firms

– More likely to have solicited their first international order,

Oct 27, 2009 Dr. Basim Makhool 7

• New environments, new problems:

• Preparedness for internationalization:

Oct 27, 2009 Dr. Basim Makhool 8

• Profit and risk during early internationalization:

• Satisfactory performance can be achieved in three ways:

Oct 27, 2009 Dr. Basim Makhool 9

A favorable combination of circumstances, locations,

Oct 27, 2009 Dr. Basim Makhool 10

1. Conduct an internal assessment of readiness to

Oct 27, 2009 Dr. Basim Makhool 11

Objective: To provide an objective assessment of

Oct 27, 2009 Dr. Basim Makhool 13

Oct 27, 2009 Dr. Basim Makhool 14

Objective: To conduct a systematic assessment of the suitability of

Oct 27, 2009 Dr. Basim Makhool 15

• Sell well in the domestic market. E.g., Microsoft

Oct 27, 2009 Dr. Basim Makhool 17

• Cultural Similarity with Target Market may

Oct 27, 2009 Dr. Basim Makhool 18

Oct 27, 2009 Dr. Basim Makhool 20

Oct 27, 2009 Dr. Basim Makhool 21

• Estimate of the likely sales that can be

Oct 27, 2009 Dr. Basim Makhool 25

• Market size, growth rate, and trends in the specific

Oct 27, 2009 Dr. Basim Makhool 26

• Laboratory equipment: Examine

• Cooling equipment: Examine the number

Oct 27, 2009 Dr. Basim Makhool 28

• Best Market Reports identify the top 10 country

Oct 27, 2009 Dr. Basim Makhool 29

Oct 27, 2009 Dr. Basim Makhool 30

• Exporters tend to collaborate with foreign market

Oct 27, 2009 Dr. Basim Makhool 31

Oct 27, 2009 Dr. Basim Makhool 32

Objective: To estimate the most likely share of

Oct 27, 2009 Dr. Basim Makhool 33

Oct 27, 2009 Dr. Basim Makhool 35

• Market penetration timetable. Gradual entry gives the

Oct 27, 2009 Dr. Basim Makhool 36

Oct 27, 2009 Dr. Basim Makhool 38

Oct 27, 2009 Dr. Basim Makhool 39

• When using the analogy method, the researcher draws on