SEMINAR IN MANAGEMENT Module 5 Selecting and Managing Entry Modes

Entry Modes An entry mode is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market. The specific mode chosen depends on many factors, including experience in a market, amount of control managers desire, and potential size of the market

Entry Modes Three categories of entry modes available to companies:  Exporting, importing, and counter trade  Contractual entry  Investment entry

Why Companies Export Expand sales Diversify Sales Gain Experience Companies often drawn into exporting when customers in other countries solicit their goods Companies should not fall into the habit of simply responding to random international request – instead a more logical approach to research and analyze international opportunities and develop a coherent export strategy is needed

Step 1Step 2 Identify a potential market Match needs to abilities Step 3 Initiate meetings Developing an Export Strategy Step 4 Commit resources

Degree of Export Involvement Direct exporting (sell to buyers) Indirect exporting (sell to intermediaries) Sales representatives Distributors Sales representatives Distributors Agents Export management companies Export trading companies Agents Export management companies Export trading companies

Indirect Exporting Agents  Represent one or more indirect exporters in a target market  Typically receive compensation in the form of commissions on value of sales  Careful selection is essential because agents often represent several indirect exporters simultaneously Export Management Companies (EMC)  Export products on behalf of an indirect exporter  Operate contractually, either as an agent or as a distributor (taking ownership of the merchandise and earning a profit from its resale)  EMC services include gathering market information, formulating promotional strategies, performing specific promotional duties, researching customer credit, making shipment arrangement, and coordinating export documents

Indirect Exporting Export Trading Companies (ETC)  Provide services to indirect exporters in addition to activities directly related to client’s exporting activities  Whereas EMC is restricted to export-related activities, an ETC assists its clients by providing import, export, and countertrade services, developing and expanding distribution channels, providing storage facilities, financing trading and investment projects, and even manufacturing products  Examples include sogo shosha,chaebol

Avoiding Export Blunders Conduct market research Obtain export advice Consider a freight forwarder

Forms of Countertrade Barter Counterpurchase Offset agreement Switch trading Buyback Direct exchange without money Sale to a country in return for promise of future purchase from it Offset a hard-currency sale to a nation with future hard-currency purchase Sale by a company of an obligation to purchase from a country Export of industrial equipment in return for products the equipment produces

Export/Import Financing

High-Risk Approaches Advance payment Importer pays exporter for merchandise for merchandise before it ships before it ships Advance payment Importer pays exporter for merchandise for merchandise before it ships before it ships Open account Exporter ships Exporter ships merchandise and merchandise and later bills importer later bills importer Open account Exporter ships Exporter ships merchandise and merchandise and later bills importer later bills importer

Documentary Collection Draft (bill of exchange) Bill of lading Bank acts as intermediary without accepting financial risk Document that orders an importer to pay an exporter a specified sum of money at a specified time Contract between an exporter and shipper specifying destination and shipping costs for merchandise

Documentary Collection Process

Letter of Credit Importer’s bank issues a document stating that the bank will pay the exporter when exporter fulfills document’s terms  Irrevocable  Revocable  Confirmed

Letter of Credit Process

Licensing Advantages + Finance expansion + Reduce risk + Reduce counterfeits + Upgrade technologies – Restrict licensor’s future – Reduce global consistency – Lend strategic property Disadvantages Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specified time

Franchising Advantages + Low cost and low risk + Rapid expansion + Local knowledge – Cumbersome – Lost flexibility Disadvantages Company (franchiser) supplies another (franchisee) with intangible property over an extended period

Management Contract Company supplies another with managerial expertise for a specific period of time Advantages + Few assets risked + Nations finance projects + Develops local workforce Disadvantages – Personnel at risk – Create competitor

Turnkey Project Advantages + Firms specialize in core competency competency + Nations obtain infrastructure projects projects – Politicized process – Create competitor Disadvantages Company designs, constructs, and tests a production facility for a client

Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company Advantages + Day-to-day control + Coordinate subsidiaries Disadvantages – Expensive – High risk

Joint Venture Separate company created and jointly owned by two or more independent entities to achieve a common business objective Forward Backward Buyback Multistage Advantages Reduce risk level Penetrate markets Access channels Protect interests Disadvantages Partner conflict Lose control

Strategic Alliance Disadvantages Create competitor Partner conflict Advantages Share project cost Tap competitors’ strengths Gain channel access Protect interests Entities cooperate (but do not form a separate company) to achieve strategic goals of each

Entry Modes: Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience

Risk, Control, Experience