CHAPTER 14:

ENTRY STRATEGY
CHAPTER 15: EXPORTING
(selected topics: lecture +
pages 534-46)
 Basic Decisions for Market
Entry
► Which markets to
enter?

► When to enter
these markets?

► What is the scale

of entry?
 Which Markets to Enter?
► Attractiveness of a foreign market is
based on balancing benefits, costs,
and risks associated with doing
business in that country.
► The political, economic, legal, and
cultural differences of each market
must be evaluated.
► Is a firm’s product or service offering
suited to a market and to the
competitive environment in that
market?
 Which Markets to Enter?
► Favorable ► Unfavorable
 Politically stable  Politically
developed and unstable
developing developing
nations nations with a
 Free market mixed or
systems command
 No dramatic economy or
where speculative
upsurge in
financial bubbles
inflation or
private-sector have led to
excess borrowing
 When to Enter the Market?
► Advantages in early market entry:
 First-mover advantage.
 Build sales volume.
 Move down experience curve and achieve
cost advantage.
 Create switching costs.
► Disadvantages:
 First mover disadvantage - pioneering
costs.
 Changes in government policy.
 Scale of Entry in Market
► Large scale entry
 Strategic Commitments - a decision that
has a long-term impact and is difficult to
reverse.
 May cause rivals to rethink market entry.
 May lead to indigenous competitive
response.
► Small scale entry:
 Time to learn about market.
 Reduces exposure risk.
 Decisions about Entry
► There is no”right” decision
► Depends on level of risk associated
with entry and the attitude and
willingness of the company towards
the risk.
► Businesses in developing countries
should use entry of foreign
multinationals as a way to increase
learning, identify ways to differentiate
their own company and improve
performance. Example: Jollibee Fast
 Example: Jollibee

www.jollibee.com
 ENTRY MODES
► Exporting
► Turnkey Projects
► Licensing
► Franchising
► Joint Ventures
► Wholly Owned
Subsidiaries
 EXPORTING
► EXPORTING: sale of
products produced in one
country to residents of
another country
► Advantages:
 Avoids cost of establishing
manufacturing operations
 May help achieve
experience curve and
location economies
► Disadvantages:
 May compete with low-
cost location
manufacturers
 Possible high
transportation costs
 Tariff barriers
PROCESS OF EXPORTING: TRANSPORTATION
EXAMPLE: EXPORTING FLOWER POWER
NATIONAL GEOGRAPHIC, “Flower Trade.” April 2001, page 113.
PROCESS OF EXPORTING:
Many Details to Manage
 STARTING POINT: the EXPORT
QUOTATION
► Shipping terms, terms of sale, or international trade terms
are all titles used in exporting to clearly define the
respective duties and liabilities of the buyer and seller in
order to avoid misunderstandings and disputes.

► Terms are defined in the Incoterms, introduced by the

International Chamber of Commerce. They are updated
approximately every 10 years.

► Incoterms identify transportation responsibilities, transfer of

risk of loss (i.e. ownership), and responsibilities of cost.

► Proforma invoice: a written quotation detailing the shipping

and payment terms, estimated weight and complete
description of goods to be supplied is highly recommended.
 Export Quotation (cont’d)
► COMMON SHIPPING TERMS
EXW - Ex-Works, named place where shipment is available
to the buyer, not loaded.
The seller will not contract for any transportation.
This can be a factory, warehouse, ranch, mill, etc).
International Carriage NOT Paid by Seller
FOB - Free On Board vessel, named ocean port of
shipment.
This term is used for ocean shipments only where it is
important that the goods pass the ship's rail.
International Carriage Paid by the Seller
CIF - Cost, Insurance and Freight, named ocean port of
destination.
This term is used for ocean shipments that are not
containerized.
INCOTERMS
EXPORT-IMPORT FINANCING
► The biggest problem is a Lack of trust between
international trading partners due to several factors:
 Parties have never met
 Language, cultural and legal system differences
 Difficulties in tracking down a party in case of
default
► Problem solved by using a third party trusted by both as an
intermediary – normally a reputable bank
► Extension of credit by exporter to importer must be
evaluated by consideration of:
 Country stability
 Customer creditworthiness
 Competition
 Exporter’s financial resources
 Export and Import Financing

Preference of a
US exporting
Firm

Preference of a
French
Importing Firm

Figs. 15-1,
15-2 ,
TRADE FACILITATED BY USE OF
A THIRD PARTY: THE BANK
Fig 15.3
THREE KEY FINANCIAL DEVICES
in EXPORT/IMPORT
TRANSACTIONS
► Letters of Credit (L/C)
 Bank guarantee on behalf of importer to exporter
assuring payment when exporter presents
specified documents
► Drafts (Bill of Exchange)
 Written order of the exporter, telling an importer
to pay a specified amount of money at a
specified time. It is the instrument which is used
as formal demand for payment in a business
transaction
► Bill of Lading
 Issued to exporter, by carrier. Serves as receipt,
contract and document of title. Straight bill of
lading is delivered to a designated consignee but
is not a document of title. An order bill of lading
directs a carrier to deliver goods to the order of a
 LETTER OF CREDIT
► Issued by a bank at the request of the
importer
► Bank pays a specified sum to a beneficiary,
normally the exporter, on presentation of
particular, specified documents
► Fee paid by importer for letter of credit
► May reduce borrowing ability of importer
since the letter is a financial liability
LETTER OF CREDIT
LETTER OF CREDIT
 DRAFT (BILL of EXCHANGE)
► Written by an exporter instructing an
importer to pay specified amount of money
at specified time
► Required before the buyer can obtain the
merchandise
► Two types
 Sight drafts - payable on presentation to
the drawee
 Time draft - negotiable instrument
allowing for delay in payment
DRAFTS/ BILLS OF EXCHANGE
 BILL OF LADING
► Issued to the exporter by the common
carrier transporting the merchandise
► Serves three purposes:
 Receipt - merchandise described on document
has been received by carrier
 Contract - carrier is obligated to provide
transportation service in return for a certain
charge
 Document of title – can be used to obtain
payment or a written promise before the
merchandise is released to the importer
BILL OF LADING
 Letter of Credit process:
Using all three types of documents
► FIGURE 15.4
 EXPORTING:
OTHER METHODS OF PAYMENT
► OPEN ACCOUNT (only with established
relationship)
► CREDIT CARD
► PAYMENT IN ADVANCE (CIA = cash in
advance; or advance wire transfer)
► DOCUMENTARY COLLECTION (sight bank
draft or time bank draft)
► LETTER OF CREDIT
► COUNTERTRADE (barter,
counterpurchase, etc.)
 The Problems and Pitfalls
of Exporting
►Firms that do not export lose out on huge
opportunities for growth and cost reduction
►Large firms pro-active in seeking foreign
opportunities
►Medium and small-sized firms slow to respond
 Too busy with local side of business
 Ignorance of potential opportunities
 Intimidated by mechanics of exporting to a foreign
country
 BIGGEST PROBLEMS TO
► Biggest impediment EXPORTING
to exporting is lack of knowledge of the
opportunities available.
► More than 200 countries with widely differing cultures compose the
world of export opportunities.
► Overcome impediments by collecting information
► Japan: Ministry of International Trade and Industry (MITI) and
trading houses (Sogo sosha)
► US: Department of Commerce (International Trade
Administration, Foreign Commercial Service Agency, USDA,
etc. http://www.export.gov/
 International Trade Administration
 United States and Foreign Commercial service agency
► Provide “best prospects” list, “comparison shopping service,”
and customized market research survey for a small fee
► Organizes exhibitions at international trade fairs to help
potential exporters make foreign contacts and explore export
opportunities
► Matchmaker program
► Trade Commissions
 Maintained by many large cities
 Provide business counseling, information gathering, and financing
► Commercial banks and major accounting firms
 EXPORT MANAGEMENT
STRATEGY
Risks can be decreased ► Build strong and
by taking few steps enduring relationships
► Hire an EMC or with local distributors &
experienced export customers.
consultant to identify
opportunities and deal ► Use all sources of
with red-tape information and gather
► Focus on a few markets as much intelligence as
to learn what is needed possible.
to succeed ► Hire local personnel.
► Enter on a small scale ► Keep option of local
to reduce costs of any production open
failure
 cost-efficient
► Invest time and
managerial economies of scale
commitment in building  greater market
export sales acceptance
 Management focus: Exporting
strategy at 3M
► Minnesota Mining and Manufacturing Co.
► 55% of the firm’s revenue was through exporting
► Export Strategy
 Enter on a small scale to reduce risks: make a little sell a
little
 Add additional product lines once the exporting
operations start to become successful
 Hire locals to promote the firm’s products; adapt to local
requirements
 Formulate global strategic plans for the export and
eventual overseas production of its products
FIDO – First in defeat others
 Start with exporting; once a product has gained
acceptance and demand is sufficient, move to local
production
HOW EXPORTERS CAN AVOID
TROUBLE: POST 9/11
 MANAGEMENT
ISSUES/POTENTIAL RISKS in the
EXPORT
► Transportation PROCESS
(value/weight ratios,
special packaging/handling?/frequent
shipments, etc.)
► Trade barriers (e.g. tariffs, administrative
trade policies, etc)
► Payment (large or small transactions/long-
time or new customers, etc)
► Issues/risks unique to an individual
product
(safety issues, government regulations/
standards, consumer preferences, etc.)
 TURNKEY PROJECTS
► TURNKEY PROJECT: contractor agrees to handle design,
construction, and start-up of project, including training of
personnel. At completion of contract, foreign client is
handed the “key” to the project.
► Examples: construction of an oil refinery, electric power
plant,
housing development
► Advantages:
 Can earn a return on knowledge asset
 Less risky than conventional FDI
► Disadvantages:
 No long-term interest in the foreign country
 May create a competitor
 Selling process technology may be selling competitive
advantage as well
Recall: Case of Starbuck’s
 LICENSING
► LICENSING: A company (licensor) licenses the right to use intangible
property (intellectual property), including patents, inventions,
formulas, designs, copyrights, trademarks, work systems, work
methods, technology, etc. to another firm (licensee). In return for
giving this permission to licensee, licensor collects a royalty fee on
every unit the licensee sells.
► Example: sodas, pharmaceuticals, Mickey Mouse toys
► Advantages:
 Overcomes restrictive investment barriers.
 Increases profitability.
 Extends profitability, product life cycle, and applications of
intangible property
 Allows firms with inadequate capital to participate in global
arena.
► Disadvantages:
 Lack of tight control over activity in a market.
 Limits flexibility of a firm to obtain most benefit from experience
curves and learning effects
 Can help to create future competitors.
 Licensing
Example: Introduction to BHC Pharma International Cooperation &
Licensing (ICL)

Pharmaceuticals
At Bayer, we've increased research productivity more than 50% over
the past five years. We've implemented new technologies like
Pharmaco- and Toxicogenomics to refine our drug development
process. We've launched new drugs while continuing to support
cornerstone products like Cipro®, Avelox®, and the classic Bayer
Aspirin line. We've become the recognized leader in clinical trial
standards, ensuring greater safety for the patients who use our drugs.
And our partners helped us every step of the way.

Our collaborations help us discover new therapies smarter and faster.

That's why our International Cooperation and Licensing Group (ICL) is
always looking to develop new partnerships that enhance our internal
capabilities. Whether through research, licensing, or marketing
agreements, together we can form an alliance that truly impacts
human health.
 FRANCHISING
► Franchising: specialized form of licensing in which
an entrepreneur (franchisee) buys the use of
intangible property and operates a business under
a license issued by a parent company (franchisor).
The franchisee pays the franchisor for use of
trademarks, products, formulas, and business
plans. The franchisor usually insists on certain
standards and assists the franchisee in
management of the business.
► Examples: McDonald’s, Hilton Hotels
► Advantages:
 Reduces costs and risk of establishing enterprise
 Building a global presence can be quicker
► Disadvantages:
 May prohibit movement of profits from one
country to support operations in another country
 Quality control
FRANCHISING
► Top 10 Global Franchises for 2005

► Subway
► Curves
► Quizno's Franchise Co.,
► The Kumon Math & Reading Centers
► KFC Corp.
► UPS Store, The
► RE/MAX Int'l. Inc.
► Domino's Pizza LLC
► Jani-King
Jani-King
► GNC Franchising Inc.

► Top 10 Global Franchises for 2006

► Subway
► Quizno's Franchise Co.,
► Curves
► UPS Store, The/Post-Net,
The/Post-Net,
► Pizza Hut
► WSI Internet
► KFC Corp.
► Century 21 Real Estate LLC
► RE/MAX Intl Inc.
► Jani-King

Source: Entrepreneur.com
FRANCHISING

► Top 10 Global
Franchises for
2005: Services
are increasing in
importance

Source:
Entrepreneur.com
 Recall: Reasons for FDI
WHEN TO CHOOSE HORIZONTAL FOREIGN DIRECT
INVESTMENT
How high are Low
Export
transportation costs and
tariffs?
No
High Horizontal FDI
Is know-how amenable to
licensing?
Yes Yes
Horizontal FDI
Is tight control over foreign
operation required?

No No
Can know-how be protected by Horizontal FDI
licensing contract?
Yes FDI Chosen as an
Then license alternative over Exporting
or Licensing.
 JOINT VENTURES
► Joint venture: cooperative undertaking between
two or more firms, usually to create a completely
new, separate legal entity. The partners involved
usually assume equity positions in the joint
venture.
► Example: NUMMI (j.v. between Toyota and GM),
Fuji-Xerox
► Advantages:
 Benefit from local partner’s knowledge.
 Shared costs/risks with partner.
 Reduced political risk.
► Disadvantages:
 Risk giving control of technology to partner.
 May not realize experience curve or location
economies.
 Shared ownership can lead to conflict
 JOINT VENTURES

Shenker, Oded and Luo, Yadong. International Business.

Hoboken, New Jersey: wiley & Sons, 2004. (p323).
 WHOLLY-OWNED
SUBSIDIARIES
► Wholly-owned subsidiary: a subsidiary in which a
company owns 100%
► Subsidiaries can be established through either
Green-field investments or acquisitions.
► Examples: Starbuck’s purchases Seattle Coffee
chain in Great Britain; Disney Corp. builds Euro
Disney in Paris
► Advantages:
 No risk of losing technical competence to a competitor.
 Tight control of operations.
 Realize learning curve and location economies.
► Disadvantage:
 Bear full cost and risk.
 Greater economic and political risks
 Greater uncertainty
Acquisition and Green-field: pros &
cons
Acquisition Greenfield
► Pro: ► Pro:
 Quick to execute  Can build
 Preempt subsidiary it
competitors wants
 Possibly less risky  Easy to establish
► Con: operating routines
Disappointing results
► Con:
 Slow to establish
Overpay for firm
 Risky
Optimism about
value creation  Preemption by
(hubris) aggressive
competitors
Culture clash
Problems with
 Acquisition or Green-field?

Well-established,
incumbent firms.
Acquisition
Competitors
interested in
entry.

Embedded skills,
routines, culture.
Green-field
No competitors
 ADVANTAGES &
DISADVANTAGES
ENTRY MODES
 Core Competencies & Entry
Mode
► Companies often expand to earn greater
returns from their core competencies,
transferring skills and products they have to
markets which are lacking in these skills and
products.
► Entry mode may depend on whether core
competency is technological know-how or
management know-how.
► Recall that we established that firms will
choose foreign direct investment when the
other options of exporting or licensing will
not work or are not profitable.
 Selecting an entry mode
Technological Know-How Wholly owned subsidiary, except:
1. Venture is structured to reduce risk of
loss of technology.
2. Technology advantage is transitory.
Then licensing or joint venture OK

Management Know-How Franchising, subsidiaries (wholly

owned or joint venture)

Pressure for Cost Combination of exporting and wholly

Reduction leading to owned subsidiary
adoption of Global
Standardization or
Transnational strategy
 International Strategic
Alliances
► Cooperative agreements between potential or
actual competitors in different countries.
► Scope of strategic alliances: complete or by
function (e.g. production, marketing, R & D,
financial)
► Nature of strategic alliances: from joint ventures to
loose, short-term contractual agreements
► Advantages:
 Facilitate entry into market
 Share fixed costs
 Bring together skills and assets that neither company has
or can develop
 Establish industry technology standards
► Disadvantages:
 Competitors get low cost route to technology and markets,
opportunism of alliance partner prevails
Global Alliances are Different
►Firms join to attain world leadership
►Each partner has significant strength to
bring to the alliance
►A true global vision
►Relationship is horizontal not vertical
►When competing in markets not part of
alliance, they retain their own identity
►Can be useful if host country requires some
local ownership
 Strategic Alliances: Results
► Many companies find that Strategic
Alliances are a good way to:
 Get access to foreign markets
 Learn without the entire risk
 Participate in markets when a company may not
have the skill, resources, or people to do it alone
 Avoid the high cost of technology development
► But, there is a high rate of failure and
difficulty in achieving the desired success.
Strategic Alliances: Approach
► Partner Selection
 Get as much information as possible on the potential
partner
► Collectdata from informed third parties
► Former partners
► Investment bankers
► Former employees
 Get to know the potential partner before committing
► Managing the Alliance
 Build trust
►Relational capital
 Learning from partners
►Diffusion of knowledge
► Focus on quality, clarity, and frequency of
communications
 Strategic Alliances: Approach
Fig 14.1 ALLIANCE STRUCTURE
 Strategic Alliance: Strong
Foundation Required

Cateora, Philip R., & Graham, John L. International Marketing,

12th edition. P.332
 Strategic Alliance: Example
► General Mills and Nestle
created Cereal Partners
Worldwide, a joint
venture.
► Nestle had: established
plants, well-known brand
name, strong distribution
in Europe
► General Mills: cereal
technology, proven
cereal brands, and solid
marketing.
► Results: so successful(
#2 on European Cateora, Philip R., & Graham,
continent), they plan to John L. International
extend to other market Marketing, 10th edition. P.333
areas outside of Europe