Task 7 Flashcards
What is the entry mode?
Is an institutional arrangement for the entry of a company’s products and services into a new foreign market.
What are the main types of entry modes?
o Export modes, 100% externalizing, Low control, low risk, low flexibility.
Indirect exporting: Export buying agent, broker, export house, trading company, and piggyback.
Direct exporting: Distributor, agents.
o Intermediate modes(Contractual modes)
Shared control and risk, split ownership
Examples, Licensing, Franchising, Joint venture etc.
o Hierarchical modes: 100% Internalizing
High control, high risk, low flexibility.
Can be everything from moving production, marketing sales and services to foreign market.
What are the three rules for choosing the right entry mode?
- Naïve rule: Use the same entry mode for all foreign markets. It ignores the heterogeneity of the individual foreign markets.
- Pragmatic rule: use a workable entry mode for each foreign market. Start with a low-risk entry mode, when that is not profitable anymore look for another workable entry mode. Not investigated all so don’t know if it is the best option.
- Strategy rules: compare and evaluate them all, choose the one that makes the most profit over the strategic planning period subject to the availability of company resources, risk, and non-profit objectives.
Which four groups influence the entry strategy?
- Internal factors
- External factors
- Desired mode characteristics
- Transaction-specific behaviour
What are the internal factors?
o Firm size
Size is an indicator of the firm’s resources availability: increasing resource availability provides the basis for increased international involvement over time. SME’s may desire a high level of control and high resource commitment, they are most likely to enter the foreign market using export modes because they don’t have enough resources. As the firm grows it will increasingly use the hierarchical mode.
o International experience
International experience reduces the cost and uncertainty of serving a market and in turn increases the profitability of firm committing resourcing to foreign markets, with favours direct investment in form of wholly owned subsidiaries (hierarchical mode).
o Product/service
Products with high value/weight ratios (watches), are typically used for direct exporting, especially when there are significant production economies of scale or if management wishes to retain control over production. Soft drink companies often use license agreements.
o Hard services
Are those where production and consumption can be decoupled (software on cd), mass produced and standardization possible.
o Soft services
Production and consumption occur simultaneously, the consumer acts as a co-producer and decoupling is not viable = high control entry mode.
What are the external factors?
o Sociocultural distance between the home country and the host country
o Country risk and demand uncertainty
o Market size and growth
o Direct and indirect trade barriers
o Intensity of competition
o Small number of intermediaries available
What is meant by the sociocultural distance between the home country and host country as an external factor of the entry strategy?
The greater the perceived distance between the home country and foreign country in terms of economy, political system and business practices, the more likely it is that the firm will shy away from direct investment in favour of joint venture agreements or even low-risk entry modes like agents or importers (flexible to withdraw from the host market).
What is meant by the Market size and growth as an external factor of the entry strategy?
The larger the country and the size of its market and the higher the growth rate, the more likely the management will be to commit resources to its development and to consider establishing a wholly owned sales subsidiary or to participate in a majority-owned joint venture.
Small markets with less potential to grown in isolated countries might not get that many resources committed to them (exporting or license commitment).
What is meant by direct and indirect trade barriers as an external factor of the entry strategy?
Tariffs or quotas on the import of foreign goods and components favour the establishment of local production or assembly operations (hierarchical). Preference for local suppliers often encourages companies to start a joint venture. In countries require specific standards, the firm may establish a local production/assembly facility (hierarchical mode).
What is meant by the intensity of competition as an external factor of the entry strategy?
When the intensity of competition is high in a host market firms will do well to avoid internationalization, as such markets tend to be less profitable and therefore do not justify heavy resource commitment (export modes).
What are the desired mode characteristics of the entry strategy, and give a brief explanation of each part.
o Risk-averse
If the decision-maker is risk-averse they will prefer export modes or license because they typically entail the low level of financial and management resource commitment. A joint venture shares risks, financial exposure and the costs of establishing local distribution networks.
o Control
Entry modes with minimal resource commitment provide little or no control over the conditions under which the product or service is marketed abroad. Licensing ensures that production meets the quality standards. Hierarchical modes provide the most control, but also require a substantial commitment of resources.
o Flexibility
Hierarchical modes involve substantial equity investment and are typically the most costly, but the least flexible and most difficult to change in the short run. Intermediate modes (contractual agreements and joint ventures) limit the firm’s ability to adapt or change strategy when market conditions are changing rapidly.
What are the transaction-specific factors in the entry strategy?
A firm well tends to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange in the open market.
Tactic nature of know-how
Tacit is difficult to articulate and express in words. Tacit knowledge has often to do with complex products and services, where functionality is very hard to express.
When the nature of the firm-specific know-how transferred is a tactic, it is hard to draft a contract and share the knowledge, so they often use the hierarchical mode.
