1 Chapter 1 Instructor Shan A. Garib, Winter 2013

2 Overview:  Int’l trade provides opportunities for companies to be profitable and successful  Moving to new markets can be risky and expensive  Successful companies plan their market entry strategies carefully

3 Introduction to Market Entry Strategies:  Successful companies plan their market entry strategies carefully ◦ WHERE: to enter based on demand for product/service, costs, taxes, regulatory, economic and sociopolitical environments ◦ WHEN: timing is crucial ◦ HOW: mode and method of market entry important

4 Market Entry Methods:  The many methods of entry can be classifies into two groups: ◦ TRADING STRATEGIES  Indirect  Direct ◦ INVESTING STRATEGIES  Transfer Related  Foreign Direct Investment Related

5 Market Entry Methods: TRADING ENTRY STRATEGIES: Selling to foreign market Indirect - marketing to domestic/foreign intermediary buyer eg. Fiat uses Chrysler > E-Commerce Direct – marketing to foreign buyer eg. Toyota > E-Commerce

6 Market Entry Methods: INVESTING ENTRY STRATEGIES: Conducting business in a foreign market Transfer Related – transfer of property or using the property of another company Licensing – foreign company manufactures product for domestic company in return for payment Franchising – foreign company conducts business under a trademarked name in return for payment Contract Manufacturing – company outsources work to a foreign company Strategic Alliances – partnership formed with foreign company for business in foreign market

7  Licensor and the licensee  Benefits: ◦ Appealing to small companies that lack resources ◦ Faster access to the market ◦ Rapid penetration of the global markets  Caveats: ◦ Other entry mode choices may be affected ◦ Licensee may not be committed ◦ Lack of enthusiasm on the part of a licensee ◦ Biggest danger is the risk of opportunism ◦ Licensee may become a future competitor Strategic Planning for Market Entry

8  Franchisor and the franchisee  Master franchising  Benefits: ◦ Overseas expansion with a minimum investment ◦ Franchisees’ profits tied to their efforts ◦ Availability of local franchisees’ knowledge  Caveats: –Revenues may not be adequate –Availability of a master franchisee –Limited franchising opportunities overseas –Lack of control over the franchisees’ operations –Problem in performance standards –Cultural problems –Physical proximity Strategic Planning for Market Entry

9  Benefits: ◦ Labor cost advantages ◦ Savings via taxation, lower energy costs, raw materials, and overheads ◦ Lower political and economic risk ◦ Quicker access to markets  Caveats: ◦ Contract manufacturer may become a future competitor ◦ Lower productivity standards ◦ Backlash from the company’s home-market employees regarding HR and labor issues ◦ Issues of quality and production standards Strategic Planning for Market Entry

10 Market Entry Methods: INVESTING ENTRY STRATEGIES: Conducting business in a foreign market Foreign Direct Investment Related – acquiring property, assets, projects or other companies Branch Office – opening office in target market to conduct business Joint Ventures – partnership with foreign company to form a legally separate organization Greenfield – market entry through building production sites or facilities there M&A – company joins with another company in target market to create a new company

11 Qualities of an ideal subcontractor: ◦ Flexible/geared toward just-in-time delivery ◦ Able to meet quality standards ◦ Solid financial footings ◦ Able to integrate with company’s business ◦ Must have contingency plans Strategic Planning for Market Entry

12  Cooperative joint venture  Equity joint venture  Benefits: ◦ Higher rate of return and more control over the operations ◦ Creation of synergy ◦ Sharing of resources ◦ Access to distribution network ◦ Contact with local suppliers and government officials Strategic Planning for Market Entry

13  JV Caveats: ◦ Lack of control ◦ Lack of trust ◦ Conflicts arising over matters such as strategies, resource allocation, transfer pricing, ownership of critical assets like technologies and brand names Strategic Planning for Market Entry

.14  Drivers Behind Successful International Joint Ventures: ◦ Pick the right partner ◦ Establish clear objectives from the beginning ◦ Bridge cultural gaps ◦ Gain top managerial commitment and respect ◦ Use incremental approach ◦ Create a launch team during the launch phase: ◦ (1) Build and maintain strategic alignment ◦ (2) Create a governance system ◦ (3) Manage the economic interdependencies ◦ (4) Build the organization for the joint venture Strategic Planning for Market Entry

15  Greenfield Operations  Benefits: ◦ Greater control and higher profits ◦ Strong commitment to the local market on the part of companies ◦ Allows the investor to manage and control marketing, production, and sourcing decisions Strategic Planning for Market Entry

.16  Greenfield Operations  Caveats: ◦ Risks of full ownership ◦ Developing a foreign presence without the support of a third part ◦ Risk of nationalization ◦ Issues of cultural and economic sovereignty of the host country

.17  Greenfield Operations  Acquisitions and Mergers ◦ Quick access to the local market ◦ Good way to get access to the local brands  Greenfield Operations ◦ Offer the company more flexibility than acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology.

.18  Identify reasons for the company to expand or move into international trade and assessing the company’s resources, abilities and product and service in order to make decisions –  Enables Company’s to: ◦ take action! ◦ ID problems, & costs The Strategic Planning Process

.19  STEP ONE: ◦ Ask…  What are our Strategic objectives  How capable are we of meeting these objectives  What are our strengths and weaknesses The Strategic Planning Process

.20  What are our Strategic objectives? ◦ Max profits for shareholders ◦ Increase market share  Tolerate ST losses ◦ Max cash flow  Option for companies with poor cash flow eg. Dump old stock overseas STEP ONE: The Strategic Planning Process

.21  What are our Strategic objectives? ◦ Reposition the business  Opportunity to develop or extend product lines in new market  Effective if brand is already well established ◦ Acquire resources  Way to acquire new knowledge, skills or technologies STEP ONE: The Strategic Planning Process

.22  How capable are we of meeting these objectives? ◦ Determine whether company has resources, skills and capabilities to meet objectives  Analyze the company and it’s external environment…. STEP ONE: The Strategic Planning Process

.23  Analyze the company and it’s external environment….particularly:  Product or Service Offering Suitability for international market ASK:  Does it have a unique selling point or competitive advantage  Does it have limited appeal  Will it be in demand for a while  Will it be difficult to transport  Will its sale be restricted STEP ONE: The Strategic Planning Process

.24  Knowledge:  What is the company’s level of knowledge with international trade?  More knowledge = less unanticipated problems and costs  Knowledge of regulations on import/export  Market conditions to select the most appropriate market and determine pricing and marketing strategies  Resources:  What is required to enter a new market?  Human resources, larger production facilities or financing  Skill set to handle customs clearance and insurance coverage STEP ONE: The Strategic Planning Process

.25  Resources:  What is required to enter a new market?  eg. Capabilities Needed -Market Research of target market, cultural preferences -Production and process R&D for modifications, larger plant and equipment -Marketing an sales force to address target market -Distribution and delivery order fulfillment to target market -Financing source -HR skill set language, negotiation STEP ONE: The Strategic Planning Process

.26  What are our strengths and weaknesses? ◦ Links internal and external threats INTERNAL > Strengths INTERNAL > Weakness eg. Costs, skills budget EXTERNAL > Opportunity EXTERNAL > Threat eg. Social, demographic, technological STEP ONE: The Strategic Planning Process

.27  STEP TWO: ◦ Identify Potential Markets  Select based on strategic objectives  Max Profit: significant potential sales volume customers are affluent opportunity to price discriminate  Gain Market Share: market growing/unfamiliar with market market has few competitors  Improve Cash Flow: market relatively undeveloped appreciation for foreign goods market contains pockets of wealth The Strategic Planning Process

.28 ◦ Identify Potential Markets  Select based on strategic objectives  Reposition business: unfamiliarity means no prejudice opportunity to experiment in market  Acquire Resources: market contains resources/skills needed to meet objectives STEP TWO: The Strategic Planning Process

.29 ◦ Identify Potential Markets  Narrow options down by considering:  Size of market that can be reached easily - limited by cultural, demographic, geographic factors  Political situation - unstable = risk  Economic climate - stronger economy > more purchased  Market culture/lifestyle - eg. Names of products offensive The Strategic Planning Process The Strategic Planning ProcessSTEP TWO:

.30 ◦ Researching Countries and Customers  Use internet resources like CIA fact book for geo, demo, eco, pol environment and trade organizations  Use subscription databases eg. D&B  Use Government websites eg. US Dept of Commerce  Attend trade shows/fairs STEP TWO: The Strategic Planning Process

.31 ◦ Consider Potential Issues  Researching Competitive Market Entry Strategies  Analyze the industry with Michael Porter 5 forces to formulate a competitive strategy 1.Threat of New Entry or Barriers to Entry 2.Intensity of Rivalry – reduced profits 3.Threat Posed by Substitute Products 4.The Bargaining Power of Buyers – control the prices suppliers pay -Less buyers = more buyer power 5.The Bargaining Power of Suppliers – powerful when they are concentrated - Pressure on buyers to pay more STEP THREE: The Strategic Planning Process

.32 ◦ Researching Barriers to Entry  Problems with distribution or transport  Political and regulatory barriers eg export licence  Problems with obtaining payments  Costs like customs and tariffs and insurance ◦ Analyzing risks and Benefits  Measure potential risks of course of action against benefits  List all risks, benefits and impacts  Likelihood of risk vs. Impact on Company  Likelihood of benefit vs. Impact on Company STEP THREE: The Strategic Planning Process

.33 ◦ Create and Action Plan  Decide which actions to be taken and when  Decide which strategy will most likely succeed for their given market  List the steps that must be performed to put the strategy in action  Include strategies to mitigate key risks STEP FOUR: The Strategic Planning Process