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Svend Hollensen

GLOBAL MARKETING4th Edition

Some approaches to the choice

of entry mode

Lecture by Ewa Baranowska-Prokop, Ph.D.

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y

Hollensen, Global Marketing 4e, Pearson Education 2008 8-2

Mac Baren Tobacco Company:

Internationalizing the water pipe business

Is it a wise decision for MBTC to enter thewater pipe market?

Which screening criteria would yousuggest for MBTCs IMS (InternationalMarket Selection) process?

Which specific markets would yousuggest MBTC enter?

Requires web access

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-3

Learning objectives

Identify and classify different market entry

modes

Explore different approaches to the choice of

entry mode

Explain how opportunistic behaviour affects the

manufacturer/intermediary relationship

Identify the factors to consider when choosing amarket entry strategy

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-4

What is this?

An institutional arrangement necessary

for the entry of a companys products

into a new foreign market is known as

an ______.

Entry mode

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-5

Types of entry modes

Export

Intermediate

Hierarchical

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-6

Rules for choosing

mode of entry

Naive rule

Pragmatic rule

Strategy rules

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Choosing the right entry

mode

9-7

Managers must decide on the correct entry mode for a particular product/ country, this

is done by following on of three rules:

1. The Naive rule - whereby managers use the same entry mode for exporting to all

their target countries, by far the riskiest option since managers can end up using aninappropriate entry mode for a particular foreign country or forsake promising foreign

markets

2. The Pragmatic rule - whereby managers start by assessing export entry and

change their entry strategy accordingly, this saves time and effort yet ultimately fails to

bring managers to the appropriate mode

3. The Strategy rule - whereby managers use right entry mode as a key to the

success of their foreign entry strategy, making systematic comparisons of all entry

modes. It is the most complicated method yet results in better entry decisions.

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What is this?

Which rule for choosing a mode of entryis based upon selecting the mode thatmaximizes the profit contribution over

the strategic planning period subject to(a) the availability of companyresources, (b) risk and (c) non-profitobjectives?

Strategy rule

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Transaction cost approach

Opportunistic

behaviour of

export intermediary

Opportunistic

behaviour of

producer

VS

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Export intermediary

responses to opportunistic

behaviour of producerEstablish personal relations with

producers key employees

Create an independent identity inconnection with selling producers

products

Add further value to the product

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All factors affecting decision

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Internal factors affecting

market entry mode decision

Firm

size

International

experience

Product

complexity

Product

differentiation

advantage

Entry mode

decision

Product

+

+

++

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Desired mode

characteristics affecting

market entry mode decision

Flexibility

Control

Risk

averse

Entry mode

decision-

+

-

T ti ifi f t

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-14

Transaction-specific factors

affecting

market entry mode decision

Tacit nature of

know-how

Opportunistic

behaviour

Transactioncosts

Entry modedecision

+

+

+

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-15

External factors affecting

market entry mode decision

Sociocultural

distance

Country risk/

demand

uncertainty

Market size/

growth

Direct/

indirect

trade barriers

Entry mode

decision

-

-

++

Intensity of

competition

Number of

export

intermediaries-

+

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Hollensen, Global Marketing 4e, Pearson Education 2008 9-16

For discussion

Do you agree with the view that LSEs use arational analytic approach to the entry modedecision, while SMEs use a more

pragmatic/opportunistic approach?

Identify the most important factors affecting thechoice of foreign entry mode. Prioritize the

factors.

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-17

Major Types of Exporting

Indirect export

Direct export

Cooperative export

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-18

What is this?

The measurement of the strength of a

relationship between manufacturer and

export-partner in terms of trust,

commitment, and cooperation is knownas ______.

Partner mindshare

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-19

Drivers of mindshare

Commitmentand trust

Collaboration Mutualityof interest

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Export modes

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-21

What is this?

Which mode of export refers to a

manufacturers use of independent

export organizations located in its own

country (or a third country)?

Indirect export modes

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-22

Indirect export modes

Sale is like a domestic sale

Most appropriate for firms with limited

international expansion objectivesAppropriate for firms using international

sales as a means of disposing of surplus

production

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-23

Indirect entry modes

Export buying agent

Broker

Export management company

Trading company

Piggyback

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-24

What is this?

What term refers to a representative of

foreign buyers who is located in the

exporters home country and provides

services such as identifying potentialsellers and negotiating prices?

Export buying agent

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What is this?

What term refers to an agent, based in

the home country, who is a specialist in

performing contractual functions but

does not actually handle the productssold or bought?

Broker

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-26

Export management

company/export house

Specialist companies that act as the export

department

EMCs spread selling, administrative, andtransport costs because of economies

involved making large shipments of goods

from a number of companies

EMCs offer far wider exposure for client

products at a lower cost

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-27

Disadvantages of

using EMCs

EMC specialization may not correspond to

supplier objectives

EMCs are paid commission and may focus on

opportunities that enhance returns quickly

EMCs may represent too many clients to provide

outstanding service to any single one

EMCs may carry competing products

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-28

What is this?

What term refers to an indirect mode of

export which entails an inexperienced

SME riding on the capabilities of a

larger company already experienced inforeign markets?

Piggyback

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-29

Piggyback considerations

for the carrier

Advantages

Enables use ofexcess export capacity

May fill gap in productline

Broadens productrange without

development andmanufacturing costs

Disadvantages

Quality controlconcerns

Continuity of supplyissues

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-30

Piggyback considerations

for the rider

Advantages

No need for

distribution system

Opportunity to learn

from carrier

Disadvantages

Loss of control over

marketing of products

Potential lack of

commitment from

carrier

Carrier may wish toacquire rider

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-31

Direct entry modes

Export via distributors

Export via agents

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What is this?

An independent company that stocks

the manufacturers product, but has

substantial freedom to choose its own

customers and price is known asa(n)______.

Distributor

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-33

What is this?

An independent company that sells onto customers on behalf of themanufacturer, does not stock the

product, and earns profits fromcommission paid by the manufacturersis known as a(n)______.

Agent

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-34

Finding an intermediary

Ask potential customers to suggest a suitable

agent

Obtain recommendations from institutions such

as trade associations, chambers of commerce,and government trade departments

Use commercial agencies

Poach a competitors agentAdvertise in suitable trade papers

Matchmaking

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-35

Matchmaking

between manufacturer

and two potential partners

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What to look for

in an intermediary

Size of firm

Physical facilities

Willingness to carry

inventoriesKnowledge/use of

promotion

Reputation with supplier,

customers, and banks

Sales performance record

Cost of operations

Overall experience

Knowledge of English orother relevant languages

Knowledge of business

methods in

manufacturers country

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Contracts

with intermediaries

General provisions

Rights and obligations

of manufacturer

Rights and obligationsof distributor

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Principles of

the law of agency

An agent cannot take delivery of the principals

goods at an agreed price and resell them for a

higher amount without the principals knowledge

and permissionAgents must maintain strict confidentiality

regarding their principals affairs and must pass

on all relevant information

Principal is liable for damages to third parties for

wrongs committed by an agent

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Hollensen, Global Marketing 4e, Pearson Education 2008 10-39

Agent entitlements

upon contract termination

Full payment for any deal resulting from its

work

A lump sum of up to one years pastaverage commission

Compensation for damages to agents

commercial reputation caused byunwarranted termination

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Functions of

export marketing groups

Exporting in the name of

the association

Consolidating freight,

negotiating rates, andchartering ships

Performing market

research

Appointing selling agentsabroad

Obtaining credit

information and collecting

debts

Setting prices for export

Allowing uniform

contracts and terms of

sale

Allowing cooperative bidsand sales negotiation

Lysholms Linie Aquavit

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Lysholm s Linie Aquavitis exported to Sweden,

Norway, Denmark,

Germany,

and the US

Source: http://linie-aquavit.com

http://linie-aquavit.com/

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Lysholm Linie Aquavit:

A case study

What are the advantages for Arcus ofhaving distributors as part-owners?

What should be Arcus main criteria forselecting new distributors or cooperationpartners, for Linie Aquavit in new market?

Would it be possible to pursue aninternational branding strategy for Linie

Aquavit?Requires web access

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For discussion (1)

Why is exporting frequently considered the

simplest way of entering foreign markets and is

thus favoured by SMEs?

Why is it difficult financially and legally to

terminate a relationship with overseas

intermediaries? What should be done to preventor minimize such difficulties?

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For discussion (2)

How can the carrier and the rider both benefit

from a piggyback arrangement?

When a firm begins direct exporting, what tasksmust it perform?

The international marketer and the intermediary

will have different expectations concerning the

relationship. Why should these expectations bespelled out and clarfied in the contract?