Entry StrategiesPages 280 - 289

chapter nine

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

9-2

Entry Strategies and Ownership Structures

• Export/import

• Wholly-owned subsidiary

• Acquisitions and mergers

• Alliances and joint ventures

• Licensing

• Franchising

9-3

Importing and Exporting

– Often the only available choices for small and new firms wanting to go international

– Also permits larger firms to begin international expansion with minimum investment

– Permits easy access to overseas suppliers and markets

– Export/import is usually a first step in globalization

9-4

Importing

• Manufacturers often import parts and raw materials

• "Hollow corporations" do their own research and development, product design, and marketing. They hire contract manufacturers to produce the goods.

• A customs broker can be hired to handle customs paper work and make sure that the company is not over-charged on tariffs.

9-5

Managing Exporting (1)

• An export management company (EMC) is a firm that acts as its client's export department by managing the legal, financial, and logistical details of exporting, and providing advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate. The EMC– May handle the details of exporting for a fee– May take title to the goods and market them

9-6

Managing Exporting (2)

• A company can also set up its own export management department.

• This department may rely on – foreign freight forwarders who arrange

transportation– customs brokers in the destination country

9-7

Distribution Options for Exporterswho do not use EMC's

1. Hire a foreign distributor– Does the distributor have the expertise to

distribute and service the product?– What else does the distributor distribute? – Is the distributor financially stable?

Note: The exporter and the distributor may have conflicts about pricing and marketing strategy.

2. Set up your own distribution system.

9-8

Wholly Owned Subsidiaries

• A wholly owned subsidiary is an overseas operation that is totally owned and controlled by one MNC. Used when– The MNC wants total control– The MNC believes that the firm will be more

efficient without outside partners.• Some countries prohibit wholly owned

subsidiaries• Some host countries are concerned that local

firms will not be able to compete with the MNC.

9-9

Wholly Owned Subsidiaries (2)

• Home country unions sometimes view foreign subsidiaries as an attempt to “export jobs”

• Today many MNCs opt for an alliance or joint venture than a fully owned subsidiary

9-10

Mergers and Acquisitions

• These involve a cross-border purchase or exchange of equity (stock) involving two or more companies– If one company buys another, the buying company

makes an acquisition. This may create a wholly owned subsidiary, or the acquired company may be absorbed into the buying company.

– If each company contributes financially to the new company, the transaction is a merger.

9-11

Mergers and Acquisitions (2)

• The strategic plan of merged companies often calls for each to contribute a series of strengths toward making the firm a highly competitive operation

• Common problems– Cultural differences– Transition costs– Eliminating duplication of effort

9-12

Merger ExampleSprings Global

• In 2005, Springs Industries merged with Coteminas, a Brazilian textile firm that had previously done contract manufacturing for Springs

• Both companies had been privately owned. • The new company was called Springs Global• Co-CEO's until 2007

9-13

Merger Example Springs Global (2)

• Springs employees handled marketing and sales in the United States.

• Some manufacturing remained in the United States.

• Manufacturing headquarters and most manufacturing were in Brazil

• Joint supply chain management department

9-14

Springs GlobalFrom Private to Public Ownership

• In an effort to keep some manufacturing in the U. S., Springs made efficiency improvements in technology. – Springs’ U. S. manufacturing was still not cost-competitive.– Nearly all U. S. plants were shut down in 2007.

• In 2007, Springs Global made an initial public offering in the Brazilian stock market.– The 2 families that owned Springs Global (U.S. and Brazilian)

sold a substantial portion of their stock.– The founder of Coteminas is now the sole CEO of Springs

Global.

9-15

Alliances and Joint Ventures

• An alliance is any type of cooperative relationship among different firms– In a non-equity venture, the companies do not

share ownership of a business. Typically, one firm provides a service for another

• An international joint venture (IJV) is a type of alliance in which two or more partners from different countries own or control a business. – If two or more companies own stock in the

business, the joint venture is an equity joint venture.

9-16

Advantages ofAlliances and Joint Ventures

• Greater efficiency– The companies share skills and knowledge.– The companies may have greater economies of

scale

• Host country market knowledge• Ability to enter host country distribution

channels and make deals with local customers

9-17

Advantages ofAlliances and Joint Ventures (2)

• Political factors: A host country partner can deal with political issues and meet government demands for a local partner.

• In a joint venture, the partners share costs, risks, and benefits.

9-18

Strategic Alliance Recommendations

1. Know partner well before alliance is formed.2. Expect differences in alliance objectives.

Resolve these in advance if possible.3. Be careful about concluding that a potential

partner has the skills and resources that your company needs.

4. Be sensitive to the partner's needs.5. Work on developing a relationship of trust

with the partner.

9-19

Licensing

• A licensor owns an intangible property, such as a patent, copyright, trademark, formula, process, or design

• The licensor grants another firm, a licensee the exclusive right to make or sell the good in a particular geographic area for a specified period of time.

• The licensee pays a fee (usually a percentage of sales) to the licensor

9-20

When Licensing is Used

1. To market mature products, when profit margins are low, and competition is strong.

2. Avoid host country government requirements to make a major foreign investment.

3. The licensor is a small firm with limited financial and managerial resources.

4. The licensor spends a large share of its revenue on research and development.

9-21

Franchising

• A franchisor owns a trademark, logo, product line, and management methods.

• The franchisor allows a franchisee to use these assets to run a business in a particular location or geographic area, in return for a an initial fee, plus a percentage of sales.

• The franchise is usually granted for a certain period of time.

9-22

Franchising (2)

• Common in hotel, restaurant, and fast food industries

• Can be highly profitable for franchisor and franchisee

• Adjustments in the product line may be required.