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1 Chapter 1 Instructor Shan A. Garib, Winter 2013
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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.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
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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
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.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
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.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.
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.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
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.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
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.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
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.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
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.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
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.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
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.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
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.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
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.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
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.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
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.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
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.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:
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.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
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.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
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.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
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.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
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