Chapter 9: Market Entry and Expansion Flashcards
1
Q
A model of international entry and expansion
A
Slide 2
2
Q
The major motivations for firms to go international have been differentiated into…
A
- Proactive motivations
- Reactive motivations
3
Q
Proactive motivations
A
Stimuli to attempt strategic change (i.e., firms go international because they want to)
4
Q
Reactive motivations
A
Influence firms that respond to environmental shifts by changing their activities over time (i.e., firms go international because they have to)
5
Q
Proactive stimuli
A
- Profit Advantage
- Unique products
- Technological advantage
- Exclusive information
- Economies of scale
- Market size
6
Q
Reactive stimuli
A
- Competitive pressures
- Overproductoin
- Declining domestic sales
- Excess capacity
- Saturated domestic markets
- Proximity to customers and ports
7
Q
Change agents in the internationalization process: Internal
A
- Enlightened management
- New management
- Significant internal event
8
Q
Change agents in the internationalization process: External
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- Demand
- Competition
- Domestic distributors
- service firms
- business associations
- Governmental activities
- Export intermediaries: Export management companies, trading companies
9
Q
Export: Corporate export stages
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- Awareness
- Interests
- Trial
- Evaluation
- Adaptation
10
Q
Awareness
A
Awareness of international market opportunities
11
Q
Interests
A
Interests in international activities.
Eventually, firms will answer inquiries, participate in export counseling sessions, attend international trade fairs and seminars, and even begin to fill unsolicited export orders.
12
Q
Trial
A
Trial or exploratory stage. The firm begins to export, usually to psychologically close countries.
13
Q
Evaluation
A
Management conducts an evaluation of its export efforts.
After two years of the initial export, management is likely to conduct an evaluation.
14
Q
Adaptation
A
Success can also lead to the process of export adaptation.
The firm is now an experienced exporter and adjusts its activities to changing exchange rates, tariffs, etc.
15
Q
Modes of export for firms’ products
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- Direct export
- Through export intermediaries (e.g., export management company and trading company)
- Selling goods to a domestic firm who in turn sells abroad
16
Q
What is EMC?
A
Export management Companies
17
Q
What are export management companies (EMC)?
A
Domestic firms that perform international marketing services as commission representatives or distributors for other firms.
18
Q
Two primary forms of operation of EMCs (Export management companies)
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- Take title to goods and operate internationally on their own account
- Perform services as agents
19
Q
What are the most famous trading companies?
A
The sogoshosha of Japan
20
Q
What does the sogoshosha do?
A
- Importing
- Exporting
- Countertrading
- Investing
- Manufacturing
21
Q
What are the reasons for the success of the Japanese sogoshosha?
A
- The firms are organized to gather, evaluate, and translate market information into business opportunities. They have developed a strategic information advantage.
- Their vast transaction volume provides them with cost advantages. For example, they can negotiate preferential transportation rates.
- They serve large markets around the world and have transaction advantages.
- They had access to capital, both within Japan and in the international capital markets. They can carry out transactions that are larger and riskier than is feasible for other firms.
22
Q
E-commerce
A
The ability to offer goods and services over the Web.
23
Q
How can companies enter e-commerce?
A
By exporting through a variety of business-to-consumer and business-to-business forums (e.g., eBay, Alibaba)
24
Q
Licensing agreement
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One firm (the licensor) permits another firm (licensee) to use its intellectual property in exchange for compensation designated as a royalty
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Property (IPR)
- Patents
- Trademarks
- Copyrights
- Technology
- Etc.
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Advantages of licensing
- Capital investment or knowledge or marketing strength is not required
- Royalty income provides additional return on R&D investments incurred
- Reduces the exposure to both government intervention and terrorism
- Allows a firm to test a foreign market without major investment of capital or management time
- Preempts a market for competition
- Increases global protection of intellectual property rights
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Disadvantages of licensing
- Licensor gets limited expertise
- Licensor creates its own competitor
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Franchising
A parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a specified manner
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The major forms of franchising are:
- Manufacturer-retailer systems (e.g., car dealerships)
- Manufacturer-wholesaler systems (e.g., soft drink companies)
- Service firm-retailer systems (e.g., fast-food outlets)
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Reason for the international expansion of franchise systems:
- Market potential
- Financial gain
- Saturated domestic markets
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How does the franchisee benefit?
Benefits from the reduced risk of implementing a proven concept
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Franchising concerns
- The need for standardization
- Protection of the total business system (e.g., fighting with local imitation)
- Selection and training
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Master franchising system
Where foreign partners are awarded the rights to a large territory in which they can sub-franchise
34
Foreign Direct Investment (FDI)
International investment flows that acquire properties and plants. The international marketer makes such investments to create or expand a long-term interest in an enterprise with some degree of control.
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FDI: Portfolio investment
Focuses on the purchase of stocks and bonds internationally
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Reasons for FDI: Marketing factors
- Growth and profit motivations
- Wider market access to maintain and increase sales
- Circumvent barriers to trade
- Local customers' preference for domestic goods and services
- Obtain low-cost resources and ensure their supply
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Positive perspectives on FDI
- Bring in capital, economic activity, and employment
- Transfer technology and managerial skills
- Encourage competition
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Negative perspectives on FDI
- Leads to dependence
- Drain resources from host countries
- Discourage local technology development
- Bring in outmoded technology
- Create new competition for local firms
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Types of ownership: Full ownership
- 100% ownership
- Result of ethnocentric considerations based on the belief that no outside entity should have an impact on management.
- A major concern is the "fairness" of profit repatriation, or transfer of profits, and the extent to which firms reinvest into their foreign operations.
- Can be limited through legal restrictions or thorough measures designed to make foreign ownership less attractive.
40
Types of ownership: Joint ventures
- Collaborations of two or more organizations for more than a transitory period
- Partners share assets, risks, and profits
- Reasons for joint ventures are governmental and commercial
- The partners' contributions to the joint venture can vary widely and can consist of funds, technology, know-how, sales organizations, or plants and equipment.
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Advantages of joint ventures
- Pooling of resources
- Better relationship with local organizations
- The partner's knowledge of the local market
- Minimize exposure to political risk
- Tap local capital markets
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Disadvantages of joint ventures
- Different levels of control are required
- Difficulty in maintaining the relationship
- Disagreements over business decisions
- Disagreements over profit accumulations and distributions (profit repatriation)
43
What is true about internationalization regarding stimuli?
There are a variety of stimuli both pushing and pulling firms along the international path.
44
What is another way of explaining the difference between proactive and reactive motivations?
Proactive firms go international because they want to, while reactive ones go international because they have to.
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Proactive stimuli: Profits
Profits provide the strongest incentive to become involved in international marketing
46
Proactive stimuli: Unique products or a technological advantage
A second major stimulus results either from unique products or a technological advantage.
A firm’s goods or services may not be widely available from international competitors or may offer technological advances in a specialized field. Uniqueness can provide a competitive edge and result in major business success abroad.
The intensity of marketing’s interaction with the research and development function, as well as the level of investment into R&D, has been shown to have a major effect on the success of exported products.
47
Proactive stimuli: Exclusive market information
This includes knowledge about foreign customers, marketplaces, or market situations that is not widely shared by other firms. Such knowledge may result from a firm’s international research, special contacts, or being in the right place at the right time (for example, recognizing a good business situation during a vacation trip).
48
Proactive stimuli: Economies of scale
The size of the international market may enable the firm to increase its output and slide more rapidly on the learning curve. Increased production for the international market can also help reduce the cost of production for domestic sales.
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What did research by the Boston Consulting Group show?
That a doubling of output can reduce production costs up to 30%
50
What do firms do with reactive stimuli?
Here firms respond to changes and pressures in the business environment rather than blaze new trails.
51
What may a firm do in reaction to competitive pressures?
a firm may fear losing domestic market share to competing firms or losing foreign markets permanently to new competitors.
52
Reactive stimuli: Overproduction
A major reactive motivation. Instead of developing an international marketing perspective by adjusting the marketing
mix to needs abroad, firms stimulate export sales with short-term price cuts. As
soon as the domestic market demand returns to previous levels, international marketing activities are curtailed or even terminated. Firms that have used such a strategy once may encounter difficulties when trying it again because many foreign customers are not interested in temporary or sporadic business relationships.
53
What is a safety-value activity?
Historically, during downturns in the domestic business cycle, markets abroad provided an ideal outlet for high inventories. Such market expansion often does not represent a commitment by management but rather a temporary safety-valve activity.
54
Reactive stimuli: Stable or declining domestic sales
Whether measured in sales volume or market share, these also stimulate firms to expand internationally.
Products marketed by the firm domestically may be in the declining stage of the product life cycle; thus, the firm may opt to prolong the life of the product by expanding the market.
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What are "just-dated" technologies?
High-technology items that are outdated by the latest innovations
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What is an example of "just-dated" technology?
Slightly obsolete medical equipment
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When can "just-dated" technology be useful?
It can be highly useful to economic development and offer vast progress.
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Reactive stimuli: Excess capacity
Can be powerful motivation. If equipment is not fully utilized, international expansion can help achieve broader distribution of fixed costs. Alternatively, if all fixed costs are assigned to domestic production, the firm can penetrate international markets with a pricing scheme that focuses mainly on variable costs. Such a strategy may result in the offering of products abroad at a cost lower than at home, which may trigger dumping charges. In the long run, fixed-costs recovery needs to ensure the replacement of production equipment used for international marketing activities.
59
Reactive stimuli: Proximity to customers and ports
Physical closeness to foreign markets can encourage the international activities of a firm. This factor is much less prevalent in North American nations than in many other countries, since most American firms are situated far away from the border. Consider a typical 200-mile activity radius of U.S. firms, which would likely mean doing business in another state. In Europe, however, such a radius makes most firms international simply because their neighbors are so close. As an example, a European company operating in the heart of Belgium needs to go only 50 miles to be in multiple foreign markets.
60
Psychological distance
Refers to the lack of symmetry between growing international markets with respect to cultural variables, legal factors, and other societal norms.
61
Explain psychological distance
Geographic closeness to foreign markets may not translate into real or perceived closeness to the foreign customers because a foreign market that is geographically close may be psychologically distant.
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What is one example of psychological distance?
U.S. firms perceive Canada to be much closer psychologically than Mexico.
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What are two major issues that frame the context of psychological distance?
1. First, some of the distance seen by firms is based on perception rather than reality.
2. Second, at the same time, closer psychological proximity does make it easier for firms to enter markets.
64
Why might it be advantageous to enter psychologically closer markets first?
For firms new to international marketing, it may be advantageous to begin this new activity by entering the psychologically closer markets first in order to gather experience before venturing into markets that are farther away
65
What are the most successful international firms motivated by?
Proactive factors (firm-internal factors)
66
Why are the firms motivated by proactive factors the most successful internationally?
Because the motivations of firms do not seem to shift dramatically over the short term but are rather stable.
67
What is a change agent?
Someone or something within the firm that initiates change and shepherds it through to implementation.
68
Internal change agents: Type and quality of management
Is key to a firm's international activities. Over the long term, management commitment and management’s perceptions and attitudes are also good predictors of export success. Also key are the international experience and exposure of management. Managers who have lived abroad, know foreign languages, or are particularly interested in foreign cultures are likely, sooner rather than later, to investigate whether international marketing opportunities would be appropriate for their firm.
69
Internal change agents: Significant internal event
The development of a new product that can be useful abroad can serve as such an event, as can the receipt of new information about current product uses.
70
What are small and medium-sized firms?
Firms with fewer than 250 employees
71
In small and medium-sized firms, who makes the initial decision to go international?
Usually, the decision is made by the president, with substantial input from the marketing department.
72
In small and medium-sized firms, who are the leading internal change agents?
The president and the marketing department
73
From external change agents, what is the primary outside influence on a firm's decision to go international?
Foreign demand
74
What is one of the major factors that encourage firms to begin exporting?
Unsolicited international orders
75
Accidental exporters
Companies that unexpectedly find themselves as exporters
76
External change agents: Competition
Just as firms respond to competitive pressures from other companies, statements by executives from competing firms may serve as change agents. Therefore, formal and informal meetings among managers from different firms at trade association meetings, conventions, or business roundtables often trigger major change.
77
External change agents: Domestic distributors
To increase their international distribution volume, they encourage purely domestic clients to participate in the international market. This is true not only for exports but also for imports.
78
External change agents: Service first
Banks and accounting offices are examples. Although these service providers have historically followed their major multinational clients abroad, increasingly they are establishing a foreign presence and then urging domestic clients to expand their market reach.
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External change agents: Chambers of commerce and other business associations
They interact with firms locally and can frequently heighten international marketing interests. These organizations function as secondary intermediaries by sponsoring the presence and encouragement of other managers.
80
External change agents: Government
Government efforts on the national or local level can also serve as a major change agent.
In light of the contributions exports make to growth, employment, and tax revenue, governments are active in encouraging and supporting exports.
81
What are three major methods to enter new markets?
- Export
- Licensing and franchising
- Foreign direct investment
82
In some countries, when do more than a third of exporting firms commence their export activities?
Within two years of establishment
83
What are start-up or innate exporters?
Firms that commence their export activities within two years of establishment.
84
What is the typical size of Ecport management companies (EMCs)?
Most EMCs are quite small. They are frequently formed by one or two principals with experience in international marketing or in a particular geographic area.
85
Trading companies
Another major exporting intermediary. They play a unique role in world commerce by importing, exporting, countertrading, investing, and manufacturing.
Because of their vast size, they can benefit from economies of scale and survive on very low profit margins.
86
What is ETC?
Export trading company
86
What was the export trading company (ETC) legislation designed for?
Designed to improve the export performance of small and medium-sized firms in the United States permits bank participation in trading companies and reduces the antitrust threat to joint export efforts.
87
What is the purpose of bank participation in ETC?
Bank participation in ETCs was intended to allow better access to capital.
87
Why must websites be offered in several different languages?
Because companies need to consider the ever-growing population of non-English speakers on the web.
88
What are new concerns that exist if a firm uses e-commerce to enter the international marketplace?
- Due to international time differences, firms must be ready to provide 24-hour order-taking and customer-support service
- Have the regulatory and customs handling expertise to deliver internationally
- Have an understanding of global marketing environments for the further development of business relationships
- Legal concerns such as export control laws
- Firms must also consider privacy, security, and intellectual property regulations
- Companies need to be able to protect their customers from identity theft and other online scams
89
Which countries have experienced a substantial increase in usage of the Internet since the beginning of the twenty-first century?
Africa and the Middle East
90
What are some market expansion alternatives used by all types of firms, large and small?
Licensing and franchising
91
Why does a small firm use licensing?
To access intellectual property owned by a foreign business or to expand without much capital investment.
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Why would a multinational corporation use licensing?
To rapidly enter foreign markets in order to take advantage of new conditions and foreclose opportunities for its competition.
93
As an international entry strategy, what does licensing require?
Requires neither capital investment nor knowledge or marketing strength in foreign markets.
94
What does royalty income from licensing provide?
Provides an opportunity to obtain an additional return on R&D investments already incurred.
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What are key issues included in negotiating licensing agreements?
- Scope of rights conveyed
- Compensation
- Licensee compliance
- Dispute resolution
- Terma and termination of the agreement
96
What are the rights conveyed in licensing agreements?
Product or patent rights
97
What are compensation issues that the licensor would want to cover in the licensing agreement?
- Transfer costs
- R&D
- Opportunity costs
98
Transfer costs
All variable costs incurred in transferring technology to a licensee and all ongoing costs of maintaining the agreement.
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R&D costs
Incurred in researching and developing the licensed technology
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Opportunity costs
Incurred in the foreclosure of other sources of profit, such as exports or direct investment.
101
What should licensee compliance in the agreement address?
- Export control regulations
- Confidentiality of the intellectual property and technology provided
- Record keeping and provisions for licensor audits.
- The term, termination, and survival of rights must be specified.
102
Trademark licensing
Permits use of the names or logos of designers, literary characters, sports teams, and movie stars on merchandise such as clothing.
103
What is the percentage of frees from net sales for merchandising license agreements?
Fees can range between 7 to 12% of net sales
104
What can the right to franchise look like?
Can take the form of selling the franchiser's products or using its name, its production, preparation, and marketing techniques, or its business approach.
105
What is the difference between product or trade franchising and business-format franchising?
Product or trade franchising emphasizes the product or commodity to be sold, while business-format franchising focuses on ways of doing business
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What is the recipient-country view of franchising?
Franchising requires little outflow of foreign exchange, and the bulk of the profit generated remains within the country.
107
What is one key franchising concern?
The need for standardization, without which many of the benefits of the transferred know-how are lost.
108
What does standardization for franchising look like typically?
Will include the use of common business names, similar layout, and similar production or service processes.
Standardization, however, does not mean 100% uniformity.
109
Why is franchise standardization not 100% uniformity?
Adjustments in the final product need to take local market conditions into account.
110
What are other franchising concerns?
- Protection of the total business system that a franchise offers.
- Selection and training of franchisees.
111
Master franchising system
Foreign partners are selected and awarded the rights to a large territory in which they can sub-franchise in turn.
112
Why do companies turn to master franchising system?
To encourage better-organized and more successful growth.
113
How is FDI beneficial to developing countries?
FDI is the largest source of external finance for developing countries.
114
How does the United nations define multinational corporations?
Enterprises which own or control production or service facilities outside the country in which they are based.
115
Reasons for FDI
- Marketing Factors
- Government Incentives
116
Resource seekers
Search for either natural resources or human resources.
- Natural resources: Typically based on mineral, agricultural, or oceanographic advantages.
- Human resources: Search for either low-cost labor or highly skilled labor.
117
Market seekers
Corporations primarily in search of better opportunities to enter and expand within markets
118
Efficiency seekers
Attempt to obtain the most economic sources of production.
119
Derived demand
The result of the move abroad by established customers.
Large multinational firms like to maintain their established business relationships and, therefore, frequently encourage their suppliers to follow them abroad.
120
Government incentives are mainly of three types:
- Fiscal incentives
- Financial incentives
- Nonfinancial incentives
121
Fiscal incentives
Specific tax measures designed to attract the foreign investor.
They typically consist of special depreciation allowances, tax credits or rebates, special deductions for capital expenditures, tax holidays, and other reductions of the tax burden on the investor.
122
Financial incentives
Offer special funding for the investor by providing land or buildings, loans, loan guarantees, or wage subsidies.
123
Nonfinancial incentives
Consist of guaranteed government purchases; special protection from competition through tariffs, import quotas, and local content requirements; and investments in infrastructure facilities.
124
Brain drain
By employing the best and the brightest, foreign direct investors are said to deprive domestic firms of talent
125
Types of Ownership
- Full ownership
- Joint ventures
- Strategic alliances
- Government consortia
126
How do different levels of ownership affect corporations?
The different levels of ownership will affect corporate flexibility, ability to control business plans and strategy, and exposure to risk
127
Types of Ownership: Strategic alliances
- Partnerships which are arrangements between two or more companies with a common business objective.
- Networks of companies that collaborate in the achievement of a given project or objective.
- Can range from information cooperation in the market development area to joint ownership of worldwide operations.
- Some are formed to block or co-opt competitors.
- They can operate jointly as equals or have one partner "piggyback" by making use of the other's strengths.
128
Advantages of strategic alliance
- Ongoing flexibility, as they can be formed, adjusted, and dissolved rapidly in response to changing conditions.
- Market development
- Spreading the cost and risk inherent in production and development efforts.
- Firms can have a reciprocal arrangement whereby each partner provides the other access to its market.
129
Which ones are the most successful strategic alliances?
Those that match the complementary strengths of partners to satisfy a joint objective.
130
Government consortia
This form of cooperation takes place at the industry level and is typically characterized by government support or even subsidization. Usually, it is a reflection of escalating cost and a governmental goal of developing or maintaining global leadership in a particular sector.
131
Research consortia
Has emerged to combat the high costs and risks of research and development.
132
In the model of international entry and expansion, what is another word for stimuli?
Motivators
133
What are two types of stimuli or motivators?
- Proactive
- Reactive
134
What are proactive stimuli?
Firms go international because they want to
135
What are reactive stimuli?
Firms go international because they have to
136
What is a change agent?
A person who helps a company improve business performance
137
What do you do with stimuli and change agents?
You decide if you stay domestic or do export
138
What is the relationship between economies of scale and market size in proactive stimuli?
By going to China we create a larger market size, and because of a larger market size, we are able to achieve economies of scale
139
What is an example of reactive stimuli in relation to saturated domestic markets?
The Canadian market is saturated and as a result, we have to go international.
140
Internal change agents: enlightened management
A CEO just visited India and saw business opportunities in the Indian market.
141
What is NPD
New product development
142
Internal change agents: Significant internal event
We just developed a new product (NPD)
143
External change agents: Business associations
We can get business information from business associations.
In Canada, we have EDC (Export Development Canada). They have information about international markets and share those opportunities for business development.
144
How can we have awareness of business opportunities in international markets?
MR (market research)
145
Why are we interested in international expansion?
Product readiness. We are interested because we believe our product is ready for the specific foreign market.
146
How can we claim that our product is ready (product readiness)?
By discussing it from customer's perspective and company's perspective.
- Customer perspective: needs and wants of consumers in that market.
- Company perspective: Through value proposition.
147
Value Proposition
Set of benefits (b1, b2, b3). All them the benefits together is value proposition. It is done though offering (product, place, service, etc.)
148
What is an example of adaptation?
A company should export more or less to the foreign market based on the exchange rates.
149
Three types of EMCs
- Distributors: take title to goods and operate internationally on their own account. Transfer ownership happens.
- Performing service: commission representative. They don't buy goods from us. There is no transfer of ownership
-
150
Meaning of sogoshosha
Comprehensive company
- Called a comprehensive company because they do a lot of activities (importing, exporting, etc.)
151
Reason for success of sogoshosha
- First, marketing research
- Second, they have economies of scale because of huge transaction volume
- Third, access to capital
152
Patents
Who invented the product
153
Copyright
50 years to 10 years after the death of the maker.
E.g. Because of this, Shakespeare's work does not have a copyright.
154
Franchising royalty
Between 3-7% of earning
155
What is a concern of franchising?
Imitation.
For example, a fake McDonalds that looks similar but is not a real McDonalds, and is called MaDonal
156
Two key success factors for joint venture
It is like a marriage
- mutual trust
- Long term commitment
