Chapter Five Export Expansion MKT568 Global Marketing Management Dr. Fred Miller 3-1

Schmidt’s is a regional brewer in the United States which wishes to expand to international markets. Though profitable, the firm has limited production capacity, modest financial resources and no experience in international marketing. Which entry method would be most appropriate for Schmidt’s in: Vietnam Chile Portugal Describe each unique method briefly and explain how it balances the following factors: 1) financial resources required, 2) investment risk, 3) control of marketing strategy, and 4) protection of intellectual property. Nestle’s Nescafe brand has a firmly established reputation for quality around the world. The keys to this success are consistently high production standards and tightly focused promotional efforts in all host countries. Which entry method would be most appropriate for Nestle’s in: Pakistan Thailand Australia Describe each unique method briefly and explain how it balances the following factors: 1) financial resources required, 2) investment risk, 3) control of marketing strategy, and 4) protection of intellectual property. Sample Essay Questions Daimler-Chrysler has perfected new engine technology which allows its new Renewal car to get 40 mpg by cleanly burning fuels ranging from animal and vegetable oils to gas, ethanol and biodiesel. No competitor is close to matching this achievement. Which entry method would be most appropriate for Daimler- Chrysler in: Nigeria Brazil Canada Describe each unique method briefly and explain how it balances the following factors: 1) financial resources required, 2) investment risk, 3) control of marketing strategy, and 4) protection of intellectual property.

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? How should marketers match market entry methods with competitive strategies and countries?

Entry Barriers Tariff barriers Tariffs Quotas Nontariff barriers Government regulation Product/safety/environmental restrictions Financial/operating/business restrictions Natural barriers – strong competitors Distribution in mature markets Promotion budgeting in USA

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? Exporting How should marketers match market entry methods with competitive strategies and countries?

Methods of Entry Entry method exporting - direct, indirect licensing, franchising, contract manufacture/management strategic alliances (activities), joint ventures (equity) foreign direct investment, sales, production, greenfield, acquisition

Exporting Activities Direct and indirect exporting The Exporting Job shipping, documentation, legal issues, shipping terms securing local distributors, process and agreement terms getting paid, letter of credit cycle, Trade Card Export Expansion Strategy cultural distance, international learning curve/sequence sprinkler (diversification) and waterfall (focus) strategies

Principal Documents Used in Exporting required by Exhibit 5.3 Foreign Customer 1.Pro forma invoice 2.Acceptance of purchase orders 3.Ocean (airway) bill of lading 4.Certificate (or policy) of insurance 5.Packing list Exporting manufacturer 1.Purchase order 2.Letter of credit or draft (trade) acceptance Freight forwarder 1.Shipper’s letter of instructions 2.Domestic (inland) bill of lading 3.Packing list 4.Commercial invoice 5.Letter of credit (original copy) U.S. Government 1.Export Declaration 2.Export license (strategic goods and shipments to designated unfriendly nations) Foreign Governments 1.Certificate of origin 2.Customs invoice 3.Consular invoice Exporter’s bank 1.Exporter’s draft 2.Commercial invoice 3.Consular invoice 4.Insurance certificate 5.Ocean (airway) bill of lading Source: Adapted from Root, 1987, p.71. ©1987 by Jossey-Bass, Inc., Publishers. First published by Lexington Books. All rights reserved

Criteria for Choosing Distributors Previous experience (products handled, area covered, size) Services offered (inventory, repairs, after-sales service) Marketing support (advertising and promotional support) Financial strength Relations with government Cooperativeness Whether or not handling competing products

Master Foreign Distributorship Agreement Checklist Source: Adapted from Hall, 1993, pp Courtesy of Unz & Co.

Master Foreign Agency Appointment Checklist Source: Adapted from Hall, 1993, pp Courtesy of Unz & Co.

Letter of Credit Model Exhibit 5.6 Exporter seller beneficiary Importer’s bank Importer buyer account party Exporter’s bank 7. Remits payment 6. Presents documents 4. Advises of L/C 2. L/C application 10. Sends documents 11. Pays bank or gets loan United States Overseas 5. Shipment of goods 1. Purchase and agreement 9. Remits payment 8. Presents documents for negotiation 3. Opens L/C

Letter of Credit Cycle It’s a deal!!

Ordering a Letter of Credit You are Director of Procurement Services for Schmidt’s Brewing Company. You must order the letter of credit for a shipment of Czech hops for Schmidt’s new export brand. If you wish the purchase price to include shipping and insurance costs to New York, the port of entry, which shipping terms will you specify? Why is it important that your list of required documents be accurate and complete? What documents will you require your supplier to provide to receive payment? How will you confirm that you have included all the necessary documents?

Exporting Activities Direct and indirect exporting The Exporting Job shipping, documentation, legal issues, shipping termsdocumentation securing local distributors, process and agreement terms getting paid, letter of credit cycle, Trade Cardletter of credit Trade Card Export Expansion Strategy cultural distance, international learning curve/sequence sprinkler (diversification) and waterfall (focus) strategies

Price Escalation Causes tariffs, costs, intermediaries, taxes Cures lower quality/margins, different classification/channels, local assembly/manufacture (FTZ’s) Example

International Price Escalation Effects (in U.S. Dollars)

Exhibit 5.8 Factors Sprinkler/ Diversify if Waterfall/ Focus if Growth rate Low High Demand stability Low High Competitive lag Short Long Spillover High Low Need to adapt product Low High Need to adapt promo Low High Marginal sales Diminishing Increasing Need for control Low High Entry barriers Low High Market Factors Affecting Choice of Expansion Path

Chapter Six Licensing, Strategic Alliances, FDI MKT568 Global Marketing Management Dr. Fred Miller 3-1

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? Licensing and franchising How should marketers match market entry methods with competitive strategies and countries?

Forms of Licensing Straight licensing royalty, fees, supply contract Franchising fee, royalty, promotion, supply contract Turnkey projects payment, management contract Original Equipment Manufacturing (OEM) technically an export method risk structure of licensing

6-4 Elements of a Licensing Contract Technology package Definition/description of the licensed industrial property Know-how to be supplied and its method of transfer Supply of raw materials, equipment, and intermediate goods Use conditions Field of use of licensed technology Territorial rights for manufacture and sale Sublicensing rights Safeguarding trade secrets Responsibility for defense/infringement action on patents and trademarks Exclusion of competitive products Exclusion of competitive technology Maintenance of product standards Performance requirements Rights of licensee to new products and technology Reporting requirements Auditing/inspection rights oflicensor Reporting requirements of licensee

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? Alliances and JVs How should marketers match market entry methods with competitive strategies and countries?

Strategic Alliances Non-equity alliances distribution Heineken’s June 2004 agreement with FEMSA to distribute Sol and Dos Equis throughout USA and, later, joint distribution in South America manufacturing research and development Equity alliances joint ventures

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? Foreign direct investment How should marketers match market entry methods with competitive strategies and countries?

Foreign Direct Investment Advantages lowers price escalation effects avoids tariffs establishes local presence, increases learning possibilities Additional risk elements degree of financial commitment political risk country-of-origin effects Greenfield vs acquisition

Global Marketing Decisions in this Chapter What types of entry barriers do global marketers encounter? How do they affect market entry decisions? What are the advantages and disadvantages of each market entry option? Licensing and franchising How should marketers match market entry methods with competitive strategies and countries?

Selecting an Entry Method Relative to competitive position and strategy incremental entry, with relatively few resources protected technology or expertise FSA control over production and marketing Relative to market type Emerging New growth Mature Decision matrix

An Optimal Entry Mode Matrix Exhibit 6.3 Product/Market Situation

Chapter Six Licensing, Strategic Alliances, FDI MKT568 Global Marketing Management Dr. Fred Miller 3-1