EXPANSION STRATEGIES AND ENTRY*LIU - IM

LIU - IM

In this sessionExplain the three (3) basic reasons that firms contemplate before foreign expansion Compare and contrast the different modes that firms use to enter foreign mktsPros and Cons of various Entry modesOther forms of International Strategic Alliances

LIU - IM*

LIU - IM

*ENTRY DECISIONSA firm contemplating foreign expansion must make 3 basic decisions;Which mkts to enter?When to enter?On what scale?LIU - IM

LIU - IM

*Which foreign mkts?The choice of the mkt must be based on an assessment of a nations long-run profit potential. This potential is a function of several factors such as economic and political factors that influence the potential attractiveness of a foreign mktEconomic benefits such as the size of the mkt (demographics), the present wealth (purchasing power) of consumers in that mkt and the likely future wealth which depends upon economic growth rates.The attractiveness of a country as a potential mkt for an international business depends on balancing the benefits, costs and risks associated with doing business in that country.Some mkts are very large when measured by no. of consumers (China, India) but also need to look at the standards of living. Although relatively poor, they are growing so rapidly that they are attractive targets for inward investment.Suitability of the product offering to a target mkt.- value of prdt; greater value translates into higher prices or to build sales volumes.

*Timing of EntryOnce attractive mkts have been identified, it is vital to consider the timing of entryEntry is early when an international business enters a foreign mkt before other foreign firms and late when it enters after others have already established themselves.Advantages (first-mover advantages)The advantages frequently associated with early entry are commonly referred to as first-mover advantage the ability to preempt rivals and capture demand by establishing a strong brand name.Second advantage is the ability to build sales volumes in that country and ride down the experience curve ahead of rivals- giving the early entrant a cost advantage over later entrants.Third advantage is the ability of early entrants to create switching costs that tie crs into their prdts or services

*Disadvantages (first-mover disadvantages)Pioneering costs- costs that an early entrant has to bear that a later entrant can avoid. These arise mostly when a foreign countrys environment is so different from that in the firms home mkt that the enterprise has to devout considerable effort, time and money learning the rules of the game.Pioneering costs include;Costs of failure research confirms that the probability of survival increases if the firm enters a national mkt after several other foreign firms have already done so.Costs of promoting and establishing a prdt offering including costs of educating the crs- especially when the prdt being promoted is unfamiliar to local consumers. Later entrants may be able to ride on an early entrants investments in learning and cr education by watching how the early entrant proceeded in the mkt.

*Scale of entry and strategic commitmentsInternational firms must also consider the scale of entry into foreign mkts.Entering a mkt on large scale involves the commitment of significant resources rapid entry. This entry is influenced by the nature of competition in the mkt.On the positive side, it will make it easier for the company to attract crs and distributors. The scale of entry gives both the crs and distributors reasons for believing that a company will remain in the mkt for the long run.On the negative side, by committing in a specific mkt, the firm may have fewer resources available to support expansion in other desirable mkts.Note: the large scale entrant is deemed to enjoy first-mover advantages and vice versa.

*MODES OF ENTRYThe various modes for serving foreign mkts are;Exporting LicensingFranchising to host country firmsJoint venturesConsortia Wholly owned subsidiaryAcquisition LIU - IM

LIU - IM

*ExportingExport is usually domestically owned production, sales and distribution. Exporting accounts for some 10% of the global economic activity. Exporting may be direct or indirect. It may take any of the forms below;Direct exporting occurs when a company sells to a cr in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized.Indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country, which in turn exports the prdt. These include; large retailers, wholesale supply houses, trading companies and others who buy to supply crs abroadLIU - IM

LIU - IM

*Exporting has been boosted by the internet. The internet is fast becoming an important foreign mkt entry mode itself. Initially internet mktg focused on domestic sales, however, a surprisingly large no. of companies started receiving orders from crs in other countries resulting in the concept of international internet mktg (IIM).Today most companies are actively designing internet catalogues targeting specific countries with multi-lingual web sites.Companies that have been successful in using this include; Dell Computer Corporation - (Virtual store), Amazon etc.Another aspect that has boosted export as an entry mode is direct sales. Particularly of hi-technology and big ticket industrial prdts, a direct sales force may be required in a foreign country. This requirement may mean establishing an office with local and /or expatriate managers and staff depending on the course on the size of the mkt and potential sales revenues.LIU - IM

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*AdvantagesControl product and production costsGear sales and distribution to each countryNeed close coordination to insure that product matches cultural norms of the foreign market.Only good if manufacturing costs at home remain competitive.Disadvantages High transport costs- especially for bulk prdts.Tariff barriers by host country these can make exporting uneconomicalStiff competition local agents often carry the prdts of competing firms and so have divided loyaltiesLIU - IM

LIU - IM

*Licensing A licensing agreement is an arrangement where by the licensor grants the rights to intangible property to another entity- the licensee for a specified period of time and in return, the licensor receives a royalty fee from the licensee.Intangible property here includes; patents, inventions, formulas, processes, designs, copyrights and trademarks.Manufacturing, sales and distribution is all done overseas and not under the control of the home country.Proprietary technology or information is licenses to the foreign company.Major risk is losing control of sensitive product, technology or informationIt is a favourite for small and medium sized companies though by no means limited to such companies. Common examples include; TV programming, Pharmaceuticals etcLIU - IM

LIU - IM

*AdvantagesLow development costs for firms lacking capital to develop operations overseas.Licensing is a lower risk entry mode specially Licensing without the name Limits exposure to economic, financial, and political instability Permits the company access to markets that may be closed or that may have high entry barriers.Disadvantages Does not give the firm tight control over manufacturing, mktg and strategy that is required for realising experience curve and location economies.Can produce a new competitor: the licenseeCan be problematic if licensee cannot guarantee qualityit affects the brands overall reputation.

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*Franchising Similar to licensing although tends to involve longer term commitments than licensing.Franchising is basically a specialised form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business.The franchiser provides a standard package of prdts, systems and management services while the franchisee provides mkt knowledge, capital and personal involvement in management.This combination of skills permits flexibility in dealing with local mkt conditions and yet provides the parent firm with reasonable degree of control.LIU - IM

LIU - IM

*As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisees revenues.AdvantagesLower-risk entry modeLimits exposure to economic, financial, and political instability Higher level of control Very rapid market penetrationDisadvantages Can be problematic if franchisee cannot guarantee quality Can produce a new competitor: the franchiseeProblematic if the concept can be easily copiedSuitable for retailers, e.g. McDonalds, Pepsi, KFC, Uchumi, etc.

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*Example: McDonaldsSt. PetersburgBuenos AiresLIU - IM

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*Joint Venture (JV)International Joint Ventures (IJV) as a means of foreign mkt entry have accelerated sharply over the last 30 years.A JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.It has been argued that besides serving as a means of lessening political and economic risks by the amount of a partners contribution to the venture, IJVs provide a way to enter mkts that pose legal and cultural barriers that is less risky than acquisition of an existing company.Example: In 2001, Xerox and Fuji Photo = Fuji - Xerox (75/25 Xerox holding 25% ownership stake and Fuji holding 75%)LIU - IM

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*Characteristics of JVsJVs are established, separate, legal entitiesJVs acknowledge intent by partners to share in the management of the JVJVs are partnerships between legally incorporated entities like companies, chartered organisations, or governments and not between individualsEquity positions are held by each of the partners.Preferred entry mode in developing countries, where they contribute to developing local expertise and to the countrys balance of trade if production is exported.International firm provides expertise, know-how, most of the capital, brand name reputation, trademark etc while the Local partner provides the labor, the infrastructure, local expertise and relationships, and connections to the government70% of all joint ventures break up within 3.5 years

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*AdvantagesHigher control entry mode, potentially resulting in higher profits.Costs and risks shared with joint-venture partner.Local partner shares local market expertise, relationships, as well as connections to government decision-making bodies.DisadvantagesRepatriation of profits may be difficult if local government has control over stake in the local joint-venture partner.Can produce a new competitor: the joint-venture partner Shared ownership can lead to conflicts and battles for control between the investing firm if their goals and objectives change or if they take different views as to what their strategy should be.LIU - IM

LIU - IM

*ConsortiaSimilar to JVs.Characteristics They typically involve a large number of participantsThey frequently operate in a country or mkt in which none of the participants is currently active.Consortia are developed to pool financial and management resources and to lessen risk.Often, huge construction projects are build under a consortium arrangement in which major contractors with different specialties for a separate company specifically to negotiate for and produce one job.LIU - IM

LIU - IM

*Example: The most prominent international consortium has been Airbus. Airbus industries was originally formed when four major European aerospace firms agreed to work together to build commercial airliners. In 2000, the four agreed to transform the consortium to a global company to achieve operations efficiencies that would allow it to compete better against Boeing.Airbus (France Aerospatiale 38%, UK British Aerospace 20%, Germany Daimler DASA 38%, Spain Constucciones Aeronauticas 4%); founded as a challenge to BoeingHowever:Consortiums can create monopoly effect, so they are only allowed; Where expensive R&D is involvedIn underserved marketsIn markets where the government and/or the marketplace can control its monopolistic activity.

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LIU - IM

*Wholly Owned SubsidiariesIn a wholly owned subsidiary, the firm owns 100% of the stock.Establishing an wholly owned subsidiary can be done in two ways;The firm can set up a new operation in that country- often referred to as a Green field venture.Acquire an established firm in that host nation and use that firm to promote its products.AdvantagesProtection of technologyAbility to engage in global strategic coordinationAbility to realise location and experience economies.

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*Disadvantages High costs and risks

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*Acquisitions

Self study!!!!!LIU - IM

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*Other International Strategic AlliancesSometimes licensing, franchising and joint ventures are called Strategic Alliances. But in general the Strategic Alliances are more short term and have not the same level of international commitment than the named entry modes.

Strategic Alliance: a relationship between two or more companies attempting to reach joint corporate and market related goals - while remaining independent organizations. Typically, the term refers to nonequity alliances.LIU - IM

LIU - IM

*Examples of Strategic Alliances Manufacturing:Manufacturing alliance (A nonequity relationship, in which one firm handles the others manufacturing (or some aspects of it), Contract manufacturing (manufacture of products) Engineering alliances, Technological alliances, R&D alliances Marketing:A nonequity relationship, in which one firm handles marketing (or some aspects) for another firm. Distribution:One firm handles the distribution or some aspect of the distribution process for another firm.LIU - IM

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Thank you!!!!LIU - IM*

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