The Firm’s Market-Entry Strategies Chapter 12: The Firm’s Market-Entry Strategies EXPORTING ? FRANCHISING? DIRECT INVESTMENT ? TURNKEY? LICENSING ? SUB-CONTRACTING ?

TOPIC PLAN The firm’s foreign business strategy Exporting Contracting (licensing, leasing etc) Joint ventures Wholly-owned company Advantages and disadvantages of various market entries Strategic FDI plan issues

Export-import Management Company business strategies Domestic strategies Investment in product development Expand domestic market share Diversify into new industry. Foreign business strategies Exporting International contracting Foreign Direct Investment/Foreign production

The Firm’s Foreign Business Strategy Steps(Figure 12.1) 1.The firm’s evaluation Competitive advantages and disadvantages 2.Selection of a target (geographic) market. 3.Selection of product to make/sell in target market 4.Selection of market-entry mode: Exporting/Contracting/Foreign Direct Investment 5.Business plan development and execution. 6.Monitoring and evaluation of results.

Exporting World Exports of Goods (US $6,1862 billion in 2000) have declined in relative importance compared to foreign production (US$ 15,680 billion in 2000) Most likely mode for serving a foreign market for a domestic firm starting in international business. The Business Plan (Export marketing plan) Many global companies combine exports and FDI.

EXPORTS : Advantages Least costly and risky L/C payment Specialisation, economies of scale. Open to any size or kind of firm

EXPORTS : Disadvantages Production costs in the home country may be HIGHER Transport costs may make exporting uneconomical. Trade barriers in target markets. Divided loyalties of O/S agents.

Types of International Exporters The Casual Exporter Domestic firms that do not do international business on a regular basis(< 5% of T/O) The Small Scale Exporter 5-20% of turnover The Experienced/Global Exporter high ratio of its turnover through involvement in worldwide business deals(Exports +FDI)

Licensing Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment. Time and territorial limits Advantages: Speed of execution. Low risk/investment cost Brand recognition Preliminary cooperation which may be expanded into FDI

Licensing : Disadvantages Isolation from the market Lack of managerial control Limited life. Risk of technology loss

Franchising A Franchisor sells limited brand use rights,products and services to a Franchisee in return for a lump sum payment and a share of the Franchisee’s profits. 20% of US franchise systems have foreign operations (Japan,Canada,UK,Australia) -Domino vs.Pizza Haven(200 in 7 years); -Dunkin’Donuts vs.Donut King Low market entry costs and risks. Quality control is difficult due to big number of Franchisees and geographic location.

Subcontracting Supply arrangement between a principal and a subcontractor Advantages: Low investment cost Speed Stable processing cost and quality Control of sales and marketing Can become the basis for later alliance Disadvantages: Risk of non-delivery or late delivery

TURNKEY OPERATIONS Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning Advantages : high economic returns less risky than FDI Disadvantages lack of long-term market presence. loss of control over technology the client may turn into a competitor

JOINT VENTURES A legal entity jointly owned by two or more legally distinct organisations which share in the J.V.’s decision-making activities. Various options 2 companies from the same country Foreign/Local 2 or > companies setting a j.v. in a third country

JOINT VENTURES(cont.) Advantages : Disadvantages : Partner’s local knowledge Cost/risk sharing Host government legislation Low risk of nationalisation. Disadvantages : Technology control risk . Less control over subsidiaries . Management control conflicts

Wholly Owned subsidiaries A firm owns 100 percent of the stock. Trend in the motor-car sector(e.g.India,China) Advantages : complete management control. Optimum security for technology. “Internalisation” economies. Disadvantages : High costs and risks Long lead time to first sale(especially for" Greenfield”)

China:Joint ventures versus Wholly Owned

Strategic FDI Plan Issues Investment location evaluation See Matrix on next slide Strategic organisation International group Business/product units Functional units Global matrix

Investment Location Evaluation Variable 1 2 3 4 5 Weight CountryA CountryB 1x2 1x3 Political 9 Economic 6 15 18 Auto- Motive 12 16 Personnel TOTAL 10 19 17 40 44

Strategic FDI Plan Issues Financial Management and Control Investment decisions Financing decisions Global money management Global Sourcing Strategy Outsourcing Global Human Resource Strategies