8. 9 entry and expansion mode

International Business

8. Global Market Opportunity Assessment

9. Entry and Expansion Mode

Apr 8, 2023 1Dr. Basim Makhool

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.

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• 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

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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


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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.

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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.

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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

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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?

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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

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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.

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Task 3. Country ScreeningObjective: 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.

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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

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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Task 5. Foreign Partner SelectionObjectives: 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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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9.ENTRY AND EXPANSION MODES

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Basic Entry Decisions

Firms entering foreign markets make three basic decisions:

1. which markets to enter2. when to enter those markets3. 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


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Choosing a Mode of Entry

Exporting/Importing

InternationalLicensing

InternationalFranchising

Specialized Modes

Foreign Direct Investment

Decision Factors:Ownership advantagesLocation advantagesInternalization advantagesOther factors

Need for controlResource availabilityGlobal strategy

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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.

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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

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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.


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Motivations for Exporting

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

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Forms of ExportingIndirect 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

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Additional Considerations for ExportingGovernmental policies: Export promotion policies, export financing programs, and other Forms of home country subsidization encourage exporting as an entry mode.

Conversely, host countries may impose tariffs and NTBs on imported goods, thereby discouraging the firm from relying on exports as an entry mode

Marketing concerns: , such as image, distribution, and responsiveness to the customer, May also affect the decision to export.

Logistical considerations: The firm must consider the physical distribution costs of warehousing, packaging, transporting, and distributing its goods, as well as its inventory carrying costs and those of its foreign customers.

Distribution issues: . A firm experienced in exporting may choose to establish its own distribution networks in its key markets.

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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.


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


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Types of Export Intermediaries

1. Export management company

3. International trading company

4. Other intermediaries

2. Webb-Pomerene association

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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.


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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.

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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.


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Other IntermediariesManufacturers’ 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

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• 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.


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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

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The Licensing Process

Licensor leases the rights to use

intellectual property

Earns new revenues with low investment

Licensee uses the intellectual property to create products

Pays a royalty to licensor

$ $ $

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Basic Issues in International Licensing

• Specifying the boundaries of the agreement• Determining compensation• Establishing rights, privileges, and constraints• Specifying the duration of the contract

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Licensing

Advantages• Low financial risks• Low-cost way to assess

market potential • Avoid tariffs, NTBs,

restrictions on foreign investment

• Licensee provides knowledge of local markets

Disadvantages• Limited market

opportunities/profits• Dependence on

licensee• Potential conflicts with

licensee• Possibility of creating

future competitor

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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).

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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?

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Franchising

Advantages• Low financial risks• Low-cost way to assess

market potential• Avoid tariffs, NTBs,

restrictions on foreign investment

• Maintain more control than with licensing

• Franchisee provides knowledge of local market

Disadvantages• Limited market

opportunities/profits• Dependence on franchisee• Potential conflicts with

franchisee• Possibility of creating future

competitor

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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


Inter-Firm Co-Operation• 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.


Inter-Firm Co-Operation• 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


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Contract Manufacturing

Advantages• Low financial risks• Minimize resources

devoted to manufacturing

• Focus firm’s resources on other elements of the value chain

Disadvantages• Reduced control (may

affect quality, delivery schedules, etc.)

• Reduce learning potential

• Potential public relations problems

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Management Contracts

Advantages• Focus firm’s resources

on its area of contracts• Minimal financial

exposure

Disadvantages• Potential returns

limited by contract expertise

• May unintentionally transfer proprietary knowledge and techniques to contractee

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Turnkey Projects

Advantages• Focus firm’s

resources on its area of expertise

• Avoid all long-term operational risks

Disadvantages• Financial risks

– Cost overruns

• Construction risks– Delays– Problems with

suppliers

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Advantages• High profit potential• Maintain control over

operations• Acquire knowledge of

local market• Avoid tariffs and NTBs

Disadvantages• High financial and

managerial investments

• Higher exposure to political risk

• Vulnerability to restrictions on foreign investment

• Greater managerial complexity

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• Building new facilities (the greenfield strategy)• Buying existing assets in a foreign country

(acquisition strategy)• Participating in a joint venture (Equity

Participation strategy)

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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

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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


Equity Participation

• 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



• 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.



• 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.



• 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


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.


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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

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Benefits of Strategic Alliances

Potential Benefitsof Strategic Alliances

Ease ofMarketEntry

SharedRisk

Shared Knowledge

andExpertise

Synergyand

CompetitiveAdvantage

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The Scope of Strategic Alliances

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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.

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Issues in the Implementation of Strategic Alliances

Partner selection

Jointmanagement

Form ofownership

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Factors Affecting Partner Selection

CompatibilityNature of

partner services

Relative safeness Learning potential

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Approaches to Joint Management

Shared management agreements

Delegated arrangements

Assigned arrangements

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Pitfalls of Strategic Alliances

Pitfalls

Access toinformation

Distributionof earnings

Loss ofautonomy

Incompatibilityof partners

Changingcircumstances

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A COMPREHENSIVE VIEW OF INTERNATIONAL EXPANSION


•Export Strategy

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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 StrategyFour 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 StrategyChanges in Strategy over Time


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

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8. 9 entry and expansion mode

Documents

basim makhool

international markets

reactive motivations

proactive motivations

reactive firms

major motivations

international profit

international order