Market_Entry

1) Market entry The choice of which entry modes to use in entering international markets matches a company’s international strategy. Some companies will want entry modes that give them tight control over international activities because they are pursuing a global strategy, for example. Meanwhile, another company might not require an entry mode with central control because it is pursuing a multinational strategy. The entry mode must also be chosen to align well with an organization’s structure. a) Explain why and how companies use exporting, importing and countertrade: Companies being exporting to expand sales, diversify sales, or gain experience. Companies often use exporting as a low-cost, low-risk way of getting started in international business. A successful export strategy involves 4 steps : 1) identify a potential market. 2) match needs to abilities 3) initiate meeting and 4) commit resources. There are 2 basic forms of export involvement. Direct exporting occurs when a company sells its products directly to buyers in a target market. Typically, the company relies on either local sales representatives (who represent only their own company’s products, not those of other companies) or distributors (who take ownership of merchandise when it enters their countries). Indirect merchandise when it enters their counties). Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market. There are 3 general types of intermediaries: agents (indirect exporters in a target market); export management companies (firms that export products on behalf of indirect exporters); and export trading companies (firm that provide services to indirect exporters in addition to the activities directly related to clients’ exporting activities). Selling goods or services that are paid for, in whole or parts, with other goods or services is called countertrade. There are several different types of countertrade: a) barter, b) counter purchase, c) offset, d) switch trading and e) buyback. b) Explain the various means of financing export and import activities. With advance payment, an importer pays an exporter for merchandise before it shipped. With advance payment, an importer pays an exporter for merchandise before it is shipped. Documentary collection calls for a bank to act as an intermediary without accepting financial risk. A draft (bill of exchange) is a document ordering the importer to pay the exporter a specified sum of money at a specified time. A bill of lading is a contract between an exporter and a shipper that specifies destination and shipping costs of the merchandise. Under a letter of credit, the importer’s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document. There are several types of letters of credit. An irrevocable letter of credit allows the bank issuing the letter to modify the terms of the letter only after obtaining the approval of both exporter and importer. A revocable letter of credit can be modified by the issuing bank without obtaining approval from either the exporter or the importer. A confirmed letter of credit is guaranteed by both the exporter’s bank in the country of export and the importer’s bank in the country of import. Finally, under open account, an exporter ships merchandise and later bills the importer for its value. c) Describe the different contractual entry modes that are available in companies. The products of some company simply cannot be traded in open markets because they are intangible. Licensing is a contractual entry mode in which a company that owns intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. An exclusive license grants a company exclusive rights to produce and market a property, or products made from that property, in a specific geographic region. A nonexclusive license grants a company the right to use a property but does not grant it sole access to a market. Cross licensing occurs when companies use licensing agreements to swap intangible property with one another. Franchising is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period. Under the stipulations of a management contract, one company supplies another with managerial expertise for a specific period of time. Two types of knowledge can be transferred through management contracts – the specialized knowledge of technical managers and the business-management skills of general managers. When one company designs, constructs, and test a production facility for a clients, the agreement is called a turnkey (build-operate-transfer) project. Turnkey projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone. d) Explain the various types of investment entry modes. Investment entry modes entail the direct investment in plant and equipment in a country coupled with ongoing involvement in the local operation. A wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. A separate company that is created and jointly owned by 2 or more independent entities to achieve a common business objective is called a joint venture. In a joint venture characterized by forward integration, the parties choose to invest together in downstream business activities. A joint venture characterized by backward integration signals a move by each company into upstream business activities. A buyback joint venture is one whose input is provided by, and whose output is absorbed by, each of its partners. A multistage joint venture features downstream integration by one partner and upstream integration by another. A relationship in which 2 or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Companies use strategic alliances to share the cost of an international investment project, tap into competitors’ strengths, and gain access to distribution channels. e) The important strategic factors in selecting an entry mode. The key factors that influence a company’s international entry mode selection are the cultural, political and legal environments, market size, production and shipping costs, and international experience Managers are typically less confident in their ability to manage operations in unfamiliar cultures and may avoid investment entry modes in favor of exporting or a contractual mode. On the other hand, cultural similarity increase the likelihood of investment. Likewise, political differences and levels of instability cause companies to avoid large investments and favor entry modes that shelter assets. The size of a potential market also influences the choice of entry mode. For example, rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market. Setting up production in a market is desirable when the total cost of production in that market is lower than in the home market. Naturally, companies that turn out products with high shipping costs typically prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping cost. Finally, most companies make their initial foray into the international marketplace through exporting. As companies gain international experience, they will tend to select entry modes that require deeper involvement.