seminar in management module 5 selecting and managing entry modes
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SEMINAR IN MANAGEMENT
Module 5
Selecting and Managing Selecting and Managing Entry ModesEntry 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 tradeContractual 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 1 Step 2
Identify a potential market
Match needs to abilities
Step 3
Initiatemeetings
Developing an Export Strategy
Step 4
Commit resources
Degree of Export Involvement
Direct exportingDirect exporting(sell to buyers)(sell to buyers)
Indirect exportingIndirect exporting(sell to intermediaries)(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 BlundersAvoiding Export Blunders
Conduct market researchConduct market researchConduct market researchConduct market research
Obtain export adviceObtain export adviceObtain export adviceObtain export advice
Consider a freight forwarderConsider a freight forwarderConsider a freight forwarderConsider 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 nationwith 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 paymentAdvance payment
Importer pays exporterImporter pays exporter for merchandisefor merchandise before it shipsbefore it ships
Advance paymentAdvance payment
Importer pays exporterImporter pays exporter for merchandisefor merchandise before it shipsbefore it ships
Open accountOpen account
Exporter shipsExporter ships merchandise andmerchandise and later bills importerlater bills importer
Open accountOpen account
Exporter shipsExporter ships merchandise andmerchandise and later bills importerlater 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 shipperspecifying destinationand shipping costsfor 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
AdvantagesAdvantages
+ Finance expansionFinance expansion+ Reduce riskReduce risk+ Reduce counterfeitsReduce counterfeits+ Upgrade technologiesUpgrade technologies
– Restrict licensor’s futureRestrict licensor’s future– Reduce global consistencyReduce global consistency– Lend strategic propertyLend strategic property
DisadvantagesDisadvantages
Company owning intangible property (licensor) grantsCompany owning intangible property (licensor) grantsanother firm (licensee) the right to use it for a specified timeanother firm (licensee) the right to use it for a specified time
Franchising
AdvantagesAdvantages+ Low cost and low riskLow cost and low risk+ Rapid expansionRapid expansion+ Local knowledgeLocal knowledge
– CumbersomeCumbersome– Lost flexibilityLost flexibilityDisadvantagesDisadvantages
Company (franchiser) supplies another (franchisee)Company (franchiser) supplies another (franchisee)with intangible property over an extended periodwith intangible property over an extended period
Management Contract
Company supplies another withCompany supplies another withmanagerial expertise for amanagerial expertise for a
specific period of timespecific period of time
AdvantagesAdvantages
+ Few assets riskedFew assets risked+ Nations finance projectsNations finance projects+ Develops local workforceDevelops local workforce
DisadvantagesDisadvantages
– Personnel at riskPersonnel at risk– Create competitorCreate competitor
Turnkey Project
AdvantagesAdvantages+ Firms specialize in coreFirms specialize in core
competencycompetency
+ Nations obtain infrastructureNations obtain infrastructure projectsprojects
– Politicized processPoliticized process
– Create competitorCreate competitorDisadvantagesDisadvantages
Company designs, constructs, and testsCompany designs, constructs, and testsa production facility for a clienta production facility for a client
Wholly Owned Subsidiary
Facility entirelyFacility entirelyowned and controlledowned and controlled
by a single parent companyby a single parent company
AdvantagesAdvantages
+ Day-to-day controlDay-to-day control+ Coordinate subsidiariesCoordinate subsidiaries
DisadvantagesDisadvantages
– Expensive– High risk
Joint Venture
Separate company created and jointly owned by two or more Separate company created and jointly owned by two or more independent entities to achieve a common business objective independent entities to achieve a common business objective
Forward • Backward • Buyback • MultistageForward • Backward • Buyback • Multistage
Advantages
• Reduce risk level• Penetrate markets• Access channels• Protect interests
Disadvantages
• Partner conflict• Lose control
Strategic Alliance
DisadvantagesCreate competitor
Partner conflict
Advantages Share project cost
Tap competitors’ strengths Gain channel access
Protect interests
Entities cooperate (but do not form a separate Entities cooperate (but do not form a separate company) to achieve strategic goals of eachcompany) to achieve strategic goals of each
Entry Modes: Strategic FactorsEntry Modes: Strategic Factors
Cultural environmentCultural environmentCultural environmentCultural environment
Political/Legal environmentsPolitical/Legal environmentsPolitical/Legal environmentsPolitical/Legal environments
Market sizeMarket sizeMarket sizeMarket size
Production and shipping costsProduction and shipping costsProduction and shipping costsProduction and shipping costs
International experienceInternational experienceInternational experienceInternational experience
Risk, Control, Experience