Part III Flashcards
What is an entry mode?
An arrangement for the entry of a company’s products and services into a new foreign market
What are the 3 main types of entry mode?
- export
- intermediate
- hierarchical
What are the 3 different rules for selecting an entry mode?
- Naive rule
- Pragmatic rule
- Strategy rule
What is the naive rule?
the decision-maker uses the same entry strategy for all countries, it ignores markets’ heterogeneity
What is the pragmatic rule?
decision-maker uses a workable entry mode for each foreign market. Start with a low-risk entry mode. Not all potential alternatives are investigated
What is the strategy rule?
all alternative entry modes are systematically compared and evaluated before any choice is made
How do products move to another country using the export mode?
HQ (production company) > agent/importer/distributor > retail chain > End customer
How do products move to another country using the intermediate mode?
HQ (production company A) + HQ (production company B) > Joint venture (new firm C) > Retail chain > End customer
How do products move to another country using the hierarchical mode?
HQ Production company > Foreign sales subsidiary > Retail chain > End customer
What are transaction costs?
The ‘friction’ between buyer and seller that is explained by opportunistic behavior
What is opportunistic behavior?
Self-interest with guile, misleading, distortion, disguise, and confusion
What is transaction cost analysis?
this concludes that if the ‘friction’ between buyer and seller is higher than through an internal hierarchical system the firm should internalize
What are externalizing leads to transaction costs? (4)
- search costs
- contracting costs
- monitoring costs
- enforcement costs
What is externalization?
doing business through an external partner (importer, agent, distributor)
What is internalization?
integration of an external partner into one’s own organization
What are elements that may result in conflicts and opportunistic actions? (5)
- Stock size of the intermediary
- Extent of technical and commercial service to be carried out by the export intermediary
- Division of marketing costs between producer and the export intermediary
- Fixing prices
- Fixing of commissions to agents
What is opportunistic behavior from the export intermediary? (2)
- Exaggerating advertising and consumer service costs
* Manipulate information on market size and competitor prices to obtain lower ex-works prices from the product
What is opportunistic behavior from the producer?
- Threatening to use different intermediaries or change entry mode
- Tap the export intermediary for the market knowledge and customer contracts in order to internalize (do it themselves)
What 4 factors influence the entry mode?
- Internal factors
- External factors
- Desired mode factors
- transaction-specific factors
What are internal factors that influence the entry mode? (3)
- Firm size
- International Experience
- Product/service
What are external factors that influence the entry mode? (6)
- Sociocultural distance between home country and host country
- Country risk / demand uncertainty
- Market size and growth
- Direct and indirect trade barriers
- Intensity of competition
- Small number of relevant export intermediaries available
How is ‘size’ an internal factor that influences the entry mode?
Size is an indicator of the firm’s resources availability. Increasing resources = increased international involvement.
How is ‘international experience’ an internal factor that influences the entry mode?
International experience reduces the costs and uncertainty of serving a market.
It increases the probability of firms committing resources to foreign markets.
How is the ‘product/service’ an internal factor that influences the entry mode?
Products with high value/ weight ratio are typically used for direct exporting.
Soft services/products are more likely to choose a hierarchical entry mode than hard services
How is the ‘sociocultural distance between the home country and host country’ an external factor that influences the entry mode?
The greater the sociocultural difference between the countries –> firms will favor entry modes that involve relatively low resource commitments and high flexibility
How is the ‘country risk/demand uncertainty’ an external factor that influences the entry mode?
Firm risks inventory, receivables, exchange rate risk, political risk. When there is a high country risk the firm will favor more flexible entry modes that have low resource commitments
How are the ‘market size and growth’ an external factor that influences the entry mode?
A large country will have a higher growth rate and management will be more likely to commit more resources and consider a wholly-owned sales subsidiary
How are the ‘direct and indirect trade barriers’ external factors that influence the entry mode?
Tariffs or quotas on the import of foreign goods and components favor the establishment of local production or assembly operations
How is ‘the intensity of competition’ an external factor that influences the entry mode?
The greater the intensity of competition in host market, the more the firm will favor entry modes that involve low resource commitments
How is the ‘small number of relevant intermediaries available’ an external factor that influences the entry mode?
when there is a small number bargaining firms will favor use of hierarchical modes in order to reduce the scope for opportunistic behavior
What are the desired mode characteristics that influence the entry mode? (3)
- Risk-averse
- Control
- Flexibility
How is ‘risk-averse’ a desired mode characteristic that influences the entry mode?
Decision-makers that are risk-averse prefer export modes or intermediate modes because these typically entail low levels of financial and management commitment
How is ‘control’ a desired mode characteristic that influences the entry mode?
when there is a low level of control there will be minimal resource commitment
How is ‘flexibility’ a desired mode characteristic that influences the entry mode?
hierarchical modes are the least flexible and often need for a large investment of equity
What is the transaction-specific factor that influences the entry mode?
Tacit nature of know-how
What does tacit mean?
understood or implied without being stated
What are the 3 major export channels?
- Indirect export
- Direct export
- Cooperative export
What is indirect export?
Manufacturing firm does not take direct care of exporting but another domestic company performs these activities without the firm’s involvement in foreign sales
What is direct export?
The producing firm takes care of exporting activities and is in direct contact with the first intermediary in the foreign market, firm’s involvement in foreign sales to distributors
What is cooperative export?
Involves collaborative agreements with other firms concerning the performance of exporting functions
What does partner mindshare mean?
the level of mindshare that the manufacturer’s product occupies in the mind of the export partner
What are the 3 drivers of mindshare?
- commitment and trust
- collaboration
- mutuality of interest and common purpose
What are the 5 main entry modes for indirect exporting?
- export buying agent
- Broker
- Export management company
- Trading company
- Piggyback
What is an export buying agent?
a representative of foreign buyers who is located in the exporter’s home country. The agent offers services to foreign buyers such as identifying potential sellers and negotiating prices
What is the function of a broker?
to bring a buyer and seller together. The broker is a specialist in performing the contractual function and does not handle the products themselves
What is an export management company/export house?
Are specialist companies set up to act as the ‘export department’ for a range of non-competing companies
What are the advantages of an export management company? (3)
- Export management companies can spread the selling and administration costs over more products and companies.
- They deal with the necessary documentation and their knowledge of foreign markets is useful
- Allow companies to gain wider exposure of their products in foreign markets
What are the disadvantages of an export management company? (4)
- Selection of markets may be made on the basis of what is best for the EMC rather than for the company
- When paid in commission EMCs might focus on short term sales
- EMCs may be tempted to carry too many product ranges
- EMCs may carry competitive products
What is the role of a trading company?
to find a buyer quickly for products taken in exchange
What areas do trading companies play a role in? (8)
- Shipping
- Warehousing
- Finance
- Planning
- Resource development
- Insurance
- Consulting
- Real estate
What is the piggyback method?
Making use of someone else’s international distribution organization. Most often an SME wants to export (rider) and deals which a larger company (carrier) that already operates in foreign markets.
What is the piggyback method typically used for?
unrelated companies that are non-competitive but related and complementary
What is an advantage of the piggyback method to the carrier?
Can broaden its product range or fill a gap in their product line without having to develop or manufacture new products
What is a disadvantage of the piggyback method to the carrier?
It is not certain if the rider maintains the quality of the product that is sol
What is an advantage of the piggyback method to the rider?
They can export without having to establish their own distribution systems
What is a disadvantage of the piggyback method to the rider?
They have to give up control over the marketing of its products
What does direct export mean?
The manufacturer sells directly to an importer, agent or distributor located in the foreign target market
What is the definition of distributors?
Independent companies that stock the manufacturer’s product. They have the freedom to choose their customers and price
What is the definition of agents?
An independent company that sells on to customers on behalf of a manufacturer
Which 5 sources may help a firm find an intermediary?
- Potential customers
- Recommendations from institutions like trade associations and chambers of commerce
- Commercial agents
- Poaching a competitor’s agent
- Advertising in trade papers
3 principles that apply to the law of agency in all nations
- An agent cannot take delivery of the principal’s goods at an agreed price and resell them for a higher price without permission
- Agents must maintain strict confidentiality
- Principal is liable for damages to 3rd parties for wrongs committed by an agent
In which two groups can agent incentives be grouped into?
- High powered incentives (HPI)
* Low powered incentives (LPI)
What does high-powered incentives mean?
Immediate, typically monetary, rewards for accomplishing specific tasks, bonus payments for exceeding sales quota, rewards for volume sold (short-term bonding)
What does low-powered incentives mean?
Motivators, often non-monetary, do not involve immediate rewards, enable the agent to earn increased profits through continued participation in the relationship (long-term bonding)
What two factors are the international distribution partners evaluated on?
- Performance of the distributor partner
* General attractiveness of the market where the partner operates
What are export marketing groups?
groups of mostly SMEs attempting to enter export markets for the first time.
What is a motive for SMEs to join a marketing group?
the opportunity of effectively marketing a complementary product program to larger buyers.
What is an advantage of a marketing group?
Shared costs and risks of internationalization. Provide a complete product line or system sales to the customer
What is a disadvantage of a marketing group?
The risk of unbalanced relationships. Participating firms are reluctant to give up their complete independence
Why are intermediate entry modes distinguished from export modes?
because they are primarily vehicles for the transfer of knowledge and skills between partners in order to create foreign sales
What is contract manufacturing?
Manufacturing is outsourced to an external partner specialized in production and production technology
What is licensing?
A certain right is given e.g. the right to manufacture a certain product based on a patent against some agreed royalty
Why is contract manufacturing necessary?
to control product quality and meet the company’s standards
What are the two main approaches to licensing?
- ‘Stand-alone’ licensing agreement
* ‘Licensing plus’ licensing agreement
What does the stand-alone licensing agreement include?
serves primarily to specify the legal basis for the transfer of rights and enable the licensor to earn royalties. License gee can finance the licensor’s ongoing inventive activities
What does the licensing plus licensing agreement include?
Licensor uses license as a means not only to extracted royalties but also to support eh longer-term relationship with the licensee
What is a licensing agreement?
An arrangement wherein the licensor gives something of value to the license in exchange for certain performance and payments for the license
What is over-licensing?
Undermine a product by allowing too many products under a license
What is cross-licensing?
A mutual exchange of knowledge and/or patents
What rights can a license give you? (5)
- Right to use a patent covering a product or process
- Right to use manufacturing know-how
- Right to use technical advice and assistance
- Right to use marketing advice and assistance
- Right to use trademark/trade name
What is lump sum not related to payment? (related to licensing)
sum paid at the beginning of an agreement
What is minimum royalty? (related to licensing)
guarantee that at least some annual income will be received by licensor
What is running royalty? (related to licensing)
percentage of the normal selling price or a fixed sum of money for units output
What are reasons for licensing out (licensor)? (3)
- Concentrating on core competences
- Not enough resources for foreign investment
- Product reaches end of life cycle in home country
What are reasons for licensing in? (3)
- Very often initiated by the licensee
- Can boost the profit on the short-term but affect long-term profits
- Lower development costs
What is franchising?
Here the franchisor gives a right to the franchisee against payment e.g. right to use total business concept, including use of trademark, against some agreed royalty
What are the two main types of franchising?
- Product and trade name franchising
* Business format franchising
What is product and name franchising?
Similar to trademark licensing, supplier makes contracts with dealers to buy or sell products or product lines
What is business format franchising?
Market entry mode that involves a relationship between entrant (franchisor) and a host country entity, in which the former transfers under contract, a business package or format
TRUE or FALSE
In direct franchising, there is a sub franchisor/ master franchisee involved?
FALSE
this master franchisee is involved in indirect franchising
What is the meaning of joint venture?
An equity partnership typically between two partners. It involves two ‘parents’ creating the ‘child’ (the joint venture acting in the market)
What are reasons to set up a joint venture? (3)
- Technology or management skills can lead to new opportunities
- Quicker market entry
- Restriction on foreign owenership
What are the two types of joint ventures?
- Contractual non-equity joint venture
* Equity joint venture
What is a contractual non-equity joint venture?
Two or more companies form a partnership to share the costs of investment, risks, and profit
What is an equity joint venture?
Creation of a new company in which foreign and local investors share ownership and control
What is a strategic alliance?
A non-equity cooperation
What are the 3 types of value chain partnerships?
- Upstream based collaboration
- Downstream based collaboration
- Upstream/downstream based collaboration
What is an upstream-based collaboration?
Two companies work together on research and development and/or production
What is a downstream-based collaboration?
Two companies work together on marketing, distribution, sales and/or services
What is an upstream/downstream based collaboration
Two companies have different but complementary competencies at each end of the value chain
What are the 7 stages in the joint-venture formation?
- Joint-venture objectives
- Cost-benefit analysis
- Selecting partners
- Develop business plan
- Negotiation of joint venture agreement
- Contract writing
- Performance evaluation
What do you do during the joint-venture objectives step in the joint-venture formation process?
Establish strategic objectives of the joint venture and specify time period for achieving objectives
(e.g. entering new markets, reducing manufacturing costs, developing and diffusing technology)
What do you do during the cost-benefit analysis step in the joint-venture formation process?
Evaluate advantages and disadvantages of joint venture compared with alternative strategies for achieving objectives in terms of: financial commitment, synergy,k management commitment, risk reduction, control, long-run market penetration, other advantages
What is an X coalition?
The partners in the value chain divide the value chain activities between them
What is Y coalition?
Each partner contributes with complementary product lines or services and takes care of all value chain activities within its own product line
What do you do during the selecting partners step in the joint-venture formation process? (5)
- Make a profile of desired features of candidates
- Identifying joint-venture candidates and drawing up a shortlist
- Screening and evaluating possible joint-venture partners
- Initial contact/ discussions
- Choice of partner
What do you do during the develop a business plan step in the joint-venture formation process?
Achieve a broad agreement on different issues like ownership, management, production, and marketing
What do you do during the negotiation of the joint venture agreement step in the joint-venture formation process?
Final agreement on the business plan
What do you do during the contract writing step in the joint-venture formation process?
Incorporation of agreement in legally binding contract, allowing for subsequent modifications to the agreement
What do you do during the performance evaluation step in the joint-venture formation process?
Establish control systems for measuring joint venture performance
What is a hierarchical mode?
The firm owns and controls the foreign entry mode / organization
What are domestic-based sales representatives?
This sales representative resides in the home country of the manufacturer and travels abroad to perform the sales function
What does a foreign branch mean?
An extension of a legal part of the manufacturer (often called a sales office). Taxation of profits takes place in the manufacturer’s country
What is a subsidiary?
A local company owned and operated by a foreign company under the laws and taxation of the host country
What are two reasons for choosing sales subsidiaries?
- Possibility of transferring greater autonomy, control and responsibility to these subunits, being close to the customer
- Tax advantage: establish subsidiaries in countries with a lower business income tax than in the home country
How is the salary of an agent determined?
Based on a contract with minimum annual commission, a percentage of the annual sales
How is the salary of a subsidiary determined?
A fixed salary per annum, but will be paid a bonus if they fulfill certain sales objectives
What are the 4 main reasons for establishing some kind of local production?
- To defend existing business
- To gain new business
- To save costs
- To avoid government restrictions
What are the 4 subsidiary growth and integration strategies?
- Integration
- Separation
- Assimilation
- Marginalization
What happens in the subsidiary growth strategy Integration?
Values of the mother company are maintained in the subsidiary and the subsidiary develops high level of external contact
What happens in the subsidiary growth strategy Separation?
The culture of the mother company is maintained but the subsidiary limits its external embeddedness to local actors, especially suppliers
What happens in the subsidiary growth strategy Assimilation?
Lack of mother company culture maintenance and a high level of external embeddedness, subsidiary acts more on its own and assimilates into the local region with its own cultures and values
What happens in the subsidiary growth strategy Marginalization?
Head quarters culture is not established in the subsidiary and the subsidiary also limits its external embeddedness
What are region centers?
The regional headquarters will usually stimulate and coordinate the sales in the whole region
What 3 things does the coordination role consist of?
- country and business strategies are mutually coherent
- one subsidiary does not harm another
- adequate synergies are fully identified and exploited across businesses and countries
What are 3 strategic motives that affect the head quarters location?
- Mergers and acquisitions
- Internationalization of leadership and ownership
- Strategic renewal
