Copyright Atomic Dog Publishing, 2008Copyright Atomic Dog Publishing, Expansion Strategies and Entry Mode Selection Dana-Nicoleta Lascu Chapter 8

Copyright Atomic Dog Publishing, 2008Copyright Atomic Dog Publishing,

Expansion Strategies and Entry Mode Selection

Dana-Nicoleta Lascu

Chapter 8


Chapter Objectives

• Offer an understanding of company expansion strategies, entry mode selection, and the risks involved at each level.

• Describe different types of strategic alliances involving international companies.


Going International: Evaluating Opportunities

• Consider drivers of international expansion in the environment:

Competition.

Regional economic and political integration.

Economic growth.

Technology.

Converging consumer needs.

• Consider firm-related international expansion drivers:Product life-cycle considerations.

New product development costs.

Experience transfers.

Labor costs.


Example: Labor Cost Drivers Many firms cross borders in search of lower factor

costs, such as low-cost labor, capital, and land.

Hourly Compensation Costs in U.S. Dollars for Production Workers in Manufacturing:

• Country Compensation ($U.S.)

• United States 21.37

• Brazil 2.58

• Denmark 25.16

• France 17.27

• Japan 19.02

• Korea 9.04

• Mexico 2.61

• Singapore 7.26

Source: http://stats.bls.gov


Control vs. Risk in International Expansion

• Companies need to decide whether to use middlemen in the process of taking their products internationally or to market directly to the international market:

• Using middlemen requires a company to relinquish control: distributors or agents sell the product

• Direct international involvement exposes the company to substantial risk, but it also affords the company significant control of the marketing mix


Control vs. Risk in International Expansion

• Companies need to decide whether to use middlemen in the process of taking their products internationally or to market directly to the international market:

• Using middlemen requires a company to relinquish control: distributors or agents sell the product.

• Direct international involvement exposes the company to substantial risk, but it also affords the company significant control of the marketing mix.


Selecting the International Entry Mode: Indirect Exporting

Company uses home country intermediaries who, in turn, sell product overseas.

Lowest risk. Lowest control. Companies can use cooperative exporting, also

known as piggybacking and mother-henning.- Involves using the distribution system of exporters

with established systems for selling abroad who agree to handle the export function of a non-competing company on a contractual basis.


Selecting the International Entry Mode: Direct Exporting

• Firm handles its exporting function usually using its own in-house export department.

• Provides more control over the marketing mix than indirect exporting.

• Involves the use of middlemen such as:

Freight forwarders

Shipping lines

Insurers

Merchant middlemen

Retailers

Other marketing service providers, such as consultants, researchers and advertising companies


Top Purchasers of U.S. Exports

Country Purchases (Millions $U.S.)Canada 169,770Mexico 97,457Japan 52,064United Kingdom 33,895Germany 28,848China 28,419South Korea 24,099The Netherlands 20,703Taiwan 17,488France 17,068

Source: http://www.ita.doc.gov/td/industry/otea/


Selecting the International Entry Mode: Licensing

• A more risky entry mode, offers more control than exporting, and it involves a licensor and a licensee.

• Licensor• offers know-how

• shares technology

• allows for the use of its brand name

• Licensee• pays royalties for the rights to use licensor’s

technology, know-how, and brand name


Licensing (contd.)

• Licensing without the name: • When the quality of the licensee's product cannot

be guaranteed, it is preferable for the products produced under license not to carry the licensor's brand name.

• Licensing with the name: • When licensors have greater confidence in the

capability of the licensee, they are likely to allow the licensee to use their brand name when marketing the product.


Selecting the International Entry Mode: Licensing (continued)

• Advantages:

• Lower-risk entry mode.

• 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:

• Can produce a new competitor: the licensee.

• Can be problematic if licensee cannot guarantee quality – it affects the brand’s overall reputation.


Selecting the International Entry Mode: Franchising• Constitutes a principal mode of entry for the service

industry and it is the service industry’s equivalent to licensing.

• Franchisor

Gives franchisee right to use brand name, trademarks and business know-how in return for royalties.

• Franchisee

• Pays royalties for the right to use licensor’s know-how, trademarks, and brand name.


Selecting the International Entry Mode: Franchising (contd.)• Advantages:

• Lower-risk entry mode, as it limits exposure to economic, financial, and political instability.

• Higher level of control.

• Very rapid market penetration.

• Disadvantages:

• Can be problematic if franchisee cannot guarantee quality.

• Can produce a new competitor, especially if the concept can be easily copied.


Selecting the International Entry Mode: Franchising (contd.)

The McDonald’s restaurant on the left finds that the Quick imitation on the right has a comparable offering, including the Géant (giant) to compete with the Big Mac.


Selecting the International Entry Mode: Joint Venture• Joint Venture

Involves a foreign company creating a new company, in conjunction with a local company, to which the companies contribute capital, equity, and labor.

Governments of low- and medium-income countries prefer this entry mode, as joint ventures encourage:

The development of local expertise. The development of the local market. Improving the country’s balance of trade, assuming that

the production can be exported abroad.


Selecting the International Entry Mode: Joint Venture (contd.)

• Advantages:

• Higher control, potentially resulting in higher profits.

• Costs and risks shared with joint-venture partner.

• Local partner shares market expertise, relationships, and connections to local government.

• Disadvantages:

• Problematic if franchisee cannot guarantee quality.

• Repatriation of profits may be difficult if local government has control over joint-venture partner.

• Can produce a new competitor.

• 70% of all joint ventures break up within 3.5 years.


Selecting the International Entry Mode: Consortia

• Consortia:

Involve three or more companies joining forces to form a new company.

Can create monopoly effect, so they are only present…

Where costs are high, often in the area of research and development

In markets that are underserved In areas where the government or the marketplace can

control its activity.

Example: Airbus


Selecting the International Entry Mode: Wholly-Owned Subsidiaries

• Wholly Owned Subsidiaries

Can be developed by the company (greenfielding) or can be purchased (acquisition or merger).

Involve long-term market commitment. High cost. High control of operations. Greatest level of risk.


Selecting the International Entry Mode: Branch Offices

• Branch Offices

Branch offices in the target market are in charge of pricing, promotion and distribution of the product.

Like these subsidiaries, branch offices offer companies a high level of control; however, they present a much lower risk.

Involves substantial investment- sales office- showroom

Engage in a full spectrum of marketing activity.


Branch Offices (contd.)Branch offices require sales offices and show rooms; these luxury automobile manufacturers’ have show rooms in Shanghai


International Strategic Alliances• Typically, the term refers to nonequity alliances;

for example:• Manufacturing

Examples: Contract manufacturing. Engineering alliances. Technological alliances. Research and development alliances.

• Marketing One firm handles marketing for another firm.

• Distribution One firm handles the distribution or some aspect of the

distribution process for another firm.


Outsourcing• Defined as the strategic use of outside resources to perform

activities that are usually handled by internal staff and resources.

• Provides activities usually handled by internal staff, such as customer service and billing.

• Its growth has been phenomenal, and all indications suggest that this trend will continue, with the outsourcing market pegged at US$100 billion and growing.

• Asia has emerged as the outsourcing hub and back-office of the Western world, and India, China, the Philippines, and Singapore are competing for the business.

China is rapidly making inroads as an outsourcing base for English-speaking nations, a business dominated by India.

• Note: Many outsourcing alliances have failed in recent years.


Success of Outsourcing Is Predicated on the Following:

• Outsourcing must be done carefully, and with clear objectives and expectations of outsourcing activities.

• Outsourcing partners must be selected based on their expertise in the outsourcing activity and based on their cultural fit with the firm.

• The outsourcing firm must provide its partner in the strategic alliance with adequate training and skills that will help the partner adapt to other cultures.

• The outsourcing plan should provide clear expectations, requirements, and expected benefits during all phases of the outsourcing activity.


Challenges to Outsourcing

• Outsourcing is currently challenged in the United States, where government representatives urged on by their constituencies, are attempting to ban it

• These challenges are prompting European countries to contemplate restricting outsourcing in the future

• However, for every dollar going offshore, the U.S. economy gets back more than US$1.12 in income, while the countries doing the work gain 33 cents


Chapter Summary

• Addressed drivers of international expansion.

• Offered an understanding of company entry mode selection decision and the risks and control level associated with each level.

• Described different types of entry modes and the risks and control level associated with each.

Documents

Copyright Atomic Dog Publishing, 2008Copyright Atomic Dog Publishing, Expansion Strategies and Entry Mode Selection Dana-Nicoleta Lascu Chapter 8