FMA 6043 Chapter 12

1. FMA 6043Chapter 12 Strategies for Analyzing and Entering Foreign Markets

2. 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

3. Entry Modes • Three categories of entry modes available to companies: • Exporting, importing, and counter trade • Contractual entry • Investment entry

4. 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

5. Developing an Export Strategy Step 1 Step 2 Step 3 Step 4 Identify a potential market Match needs to abilities Initiate meetings Commit resources

6. Degree of Export Involvement Direct exporting (sell to buyers) Indirect exporting (sell to intermediaries) • Sales representatives • Distributors • Agents • Export management companies • Export trading companies

7. 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

8. 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

9. Avoiding Export Blunders Conduct market research Obtain export advice Consider a freight forwarder

10. 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 nation with 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

11. Export/Import Financing

12. High-Risk Approaches • Open account • Exporter ships • merchandise and • later bills importer • Advance payment • Importer pays exporter • for merchandise • before it ships

13. Documentary Collection Bank acts as intermediary without accepting financial risk Draft (bill of exchange) Bill of lading Document that orders an importer to pay an exporter a specified sum of money at a specified time Contract between an exporter and shipper specifying destination and shipping costs for merchandise

14. Documentary Collection Process

15. 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

16. Letter of Credit Process

17. Advantages • Finance expansion • Reduce risk • Reduce counterfeits • Upgrade technologies Disadvantages • Restrict licensor’s future • Reduce global consistency • Lend strategic property Licensing Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specified time

18. Advantages • Low cost and low risk • Rapid expansion • Local knowledge Disadvantages • Cumbersome • Lost flexibility Franchising Company (franchiser) supplies another (franchisee) with intangible property over an extended period

19. Management Contract Company supplies another with managerial expertise for a specific period of time • Advantages • Few assets risked • Nations finance projects • Develops local workforce • Disadvantages • Personnel at risk • Create competitor

20. Advantages • Firms specialize in core • competency • Nations obtain infrastructure • projects Disadvantages • Politicized process • Create competitor Turnkey Project Company designs, constructs, and tests a production facility for a client

21. Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company • Advantages • Day-to-day control • Coordinate subsidiaries • Disadvantages • Expensive • High risk

22. Joint Venture Separate company created and jointly owned by two or more independent entities to achieve a common business objective Forward • Backward • Buyback • Multistage • Advantages • Reduce risk level • Penetrate markets • Access channels • Protect interests • Disadvantages • Partner conflict • Lose control

23. Strategic Alliance Entities cooperate (but do not form a separate company) to achieve strategic goals of each • Advantages • Share project cost • Tap competitors’ strengths • Gain channel access • Protect interests • Disadvantages • Create competitor • Partner conflict

24. Entry Modes: Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience

25. Risk, Control, Experience