IBM _ Unit VI _ Modes of Entry.ppt

The Practices of
International Market
Entrance for Companies
WHERE and
HOW to Grow?

Growth is top of mind for business executives.
Strong, value creating revenue growth lies within
reach of corporations that pursue best practice in
innovation, strategy, marketing, operations and
organizations.
For companies aspiring to grow, where
to compete is just as important as how.
To choose the right battlegrounds, they
must match their distinctive
capabilities with sectors where
profitability growth is likely to occur.
Internationalization

Major Motivations to Internationalization
Proactive
Motivation
Reactive
Motivation
Profit advantage
Unique products
Technology advantage
Exclusive information
Managerial
commitment
Tax benefit
Economies scale
Competitive pressure
Overproduction
Declining domestic sales
Excess capacity
Saturated domestic market
Proximity to customers
and ports

The Core Competencies
• Denning’s OLI theory stated in 1988
Ownership advantages – it consist of intangible assets
such as ‘know-how’.
Location advantages - it could be profitable for the
firms to continue these assets with factor endowment
( labor force, energy, materials, transport, and
communication channels) in foreign market.
Internationalization advantages – it must more profitable
for the firms to use its advantages rather than selling
them, or the right to use them to a foreign firm.
• Other Advantages

EXPORTING
INTERNATIONAL
CONTRACTING
INVESTMENT
Joint Venture
Greenfield
M&A
Licensing
Franchising
Contract manufacturing
Management contract
Turnkey projects
Indirect export
Direct export
Internet Entry
Choosing a Mode of Entry
B2B
B2C
With the channels
of International
Express

Mode of Entry in international Business
Information
Systems
Company Infrastructure
Logistics
Human
Resource
Profit
R&D Production
Marketing
and Sales
Customer
Service
The Value Chain by Professor Michael Porter

Indirect export modes
Manufacturer uses independent export organizations
located in its own country ( third country)
There are five main entry modes of indirect exporting.
Export buying agent – A representative of foreign
buyers who is located in the exporter’s home country.
The agent offers services to the foreign buyers: such as
identifying potential sellers and negotiating prices.
Export management company/export house – are
specialist companies set up to act as the ‘export
department ‘ for a range of companies.

Direct Export Modes
Manufacturers sells directly to an importer, agent or
distributor located in the foreign target market.
Distributor (Importer) – independent company that stocks
the manufacturer’s products. It will have substantial
freedom to choose own customers and price. It profits from
the difference between its selling price and its buying price
from the manufacturer.
Agent – Independent company that sells on to customers
on behalf of the manufacture( exporter). Usually it will not
see or stock the product. It profits from a commission
(typically 5-10%) paid by the manufacturer on a pre-agreed
basis.

CES is the world‘s largest consumer electronics
exhibition, the mainstream of Chinese color TV
enterprises every year at this international fair. In
the year 2005, the achievements of Chinese TV
Legion is far beyond people’s expectations.
The Xiaxin Electronic exhibited a 30 variety of
digital high-definition plasma TVs and high-
definition LCD TV, the only orders signed at the
meeting had more than 100,000 units.
Case Study：How to sell the Color TV Sets in USA market？
The same excited is Hisense Group, with the agent of the eight regions, including
North America, signed a $ 200 million flat-panel TV orders. In fact, in order to bypass
the high tax levy of anti-dumping restrictions in CRT television which United States
involved, the Chinese color TV providers exhibiting almost invariably played "high-end
brand, large-scale introduction of LCD and plasma flat-panel TVs”.
"In addition, in order to meet the emerging trend by United States family to information
technology, many functions are added, such as access to the Internet, TV shopping,
home security control, remote video telephony and other functions." A participants of
Chinese business representatives said.
By the end of 2011, the LCD TV's overseas sales by TCL which is the top 4 biggest
color TV producer in China reached 3.73 million units.

IBM _ Unit VI _ Modes of Entry.ppt

Piggyback – choosing a back to ride on. It is about the rider ‘s
use of the carrier’s international distribution organizations.
The Strategy of Internationalization of Logitech - with the
technology and the product sets of Performance Mouse MX
and Anywhere Mouse MX, riding on IBM and Compaq, the
revenue of 2011 was $2.32 billion.

International Contracting
Intermediate Entry modes
Contract manufacturing – is outsourced to an external partner,
specialized in production and production technology.
Licensing – the licensor gives a right to the licensee against
payment ,e.g. a right to manufacture a certain product based on a
patent against some agreed royalty.
Franchising – the franchisor gives a right to the franchisee against
payment, e.g. a right to use a total business concept/ system.
Including use of trade marks (brands), against some agreed royalty.
There are two major types of franchising:
1, Product and trade name franchising. It is very similar to the trade
mark licensing

2, Business format ‘package ‘franchising.
International business format franchising is a market entry mode that
involves a relationship between the entrant ( the franchisor ) and a
host country entity.
The package can contain the following items:
Trade marks/trade names, Copyright, designs, patents, trade secrets;
Business know how; geographic exclusivity; design of the store;
market research for the are, location selection, and management
system
Start with a response to a perceived local business opportunity, the
franchisor will more rely on the knowledge and the flexible response to
the local market.
Franchisor will try to search a long term cooperation rather than a
conflict. How to develop a monitorial system, a training procedure and
adjustment mechanism is very important.

In the early days of the Walt Disney Company,
a man came to find Walt and said to him: "I
am a furniture maker, I'll give you $300, if you
allow me to use the image of Mickey Mouse
to print it on my desk; can you?”. This was
the first trademark user fees received by the
alt Disney.
Since then, the Disney company created by a large number
of well-known animated characters such as Mickey Mouse,
Donald Duck, Snow White Princess, etc., they have widely
granted licenses, printed on a variety of goods such as
clothing, toys, purses, consumed by the world, especially
products children’s love. Today, the Walt Disney Company
has more than 4,000 trademark licensing in the world. its
products, including from the most ordinary ball-point pen to
watches, valued at over $20,000. Using permit trade
patterns for the business, the Walt Disney Company has
become a great success.

R&D
R&D
R&D
R&D
R&D
Prod
uctio
n
Produ
ction
Produ
ction
Produ
ction
Marke
ting
Market
ing
A
B
C
R&D Produ
ction
Note: A is the manufacture, B: is the partner and C: is the customer
A Upstream specialist
A
B
A Franchisor
Market
ing
C
B Downstream specialist
B Franchisee
A Licensor B Licensee
C
Sales and
service
Sales and
service
Sales and
service
Sales and
service
Sales and
service
Market
ing
Sales and
service
R&D Market
ing
Sales and
service
Produ
ction
C Y Coalition
X Coalition
C
Mar
ketin
g
Licensing
Contract
Manufacturing
Marke
ting
Prod
uctio
n
Franchising
Border
R&D Market
ing
Sales and
service
Produ
ction
A+B (e.g. a joint venture)
A+B (e.g. a joint venture)
Foreign target market
Home country or third Country
Intermediate Modes

Formal successful experience in
Malaysia 20 years ago
Franchising Practice of UK Universities in Chinese Market
The motivations of UK universities to recruit International
students worldwide since 1980s.
Former Premier Margaret Thatcher
Called on Privatization and Cut the
budget to UK Universities. The tuitions
to foreign students is 4 times high.
The Advantages of Higher Education
System: perfect quality control; plenty
of education resources; good
reputations;
WTO
committed
education
can
be
a
service
industry
UK universities exported
higher education products
since 1980s in Malaysia; then
China since middle of 1990s.
There were 100,000 Chinese
students in UK by 2009 who
bring 3 Billions Pounds to UK
economy. The plan is 120,000
students this year as
expected by E&S Ministry of
UK

Franchising Practice of UK Universities in Chinese Market
The Franchising Strategies of UK Universities – delivering the
higher education program as a package.
Foundation
Course Delivering Language Entrance
Requirement
Joint Venture
Business Model
QAA System
Monitoring
The localization
of teaching &
Staffing

Hierarchical Modes
The firm owns and controls the foreign entry mode /organization.
The degree of control that head office can exert on the subsidiary
will depend on how many and which value chain functions can be
transferred to the market.
Domestic based sales representatives – it resides in the home
county of the manufacturer and travel abroad to perform the sales
function.
Foreign branch – An extension of and a legal part of the
manufacturer( often called a sales office), taxation of profits take
place in the manufacturer’s country.
Subsidiary – A local company owned and operated by a foreign
company under the laws and taxation of the host country

R&D
R&D
R&D
R&D
R&D
Prod
uctio
n
Produ
ction
Produ
ction
Prod
uctio
n
Marke
ting
Market
ing
C
Note: C: is the customer
C
C
Sales
and
service
Sales and
service
Sales
and
service
Sales
and
service
Market
ing
Sales
and
service
R&D Market
ing
Sales
and
service
Produ
ction
C Transnational
organization
(Globally integrated)
Region centre
(two variants
C
Mar
ketin
g
Resident sales
representatives/ sales
subsidiary/ sales branch
Domestic-based sales
representatives/
manufacture’s own
Sales force
Marke
ting
Prod
uctio
n
Sales and production
subsidiary
Border
R&D Mark
eting
Sales
and
service
Prod
uctio
n
Foreign target market
Home country or third Country
Direct to customer
Corporate identity (image), personnel
Common R&D, finance Hierarchical modes

The way of HUAWEI go to
Internationalization
1
2
4
3
3
2
The main products are programmed telephone exchanger and
telecommunication software and service design
5
6

The Strategy of International Entrance by CNOOC
The Construction for new ports are on going
by CHCEC worked for CNOOC (China
National Offshore Oil Corporation ) to build
bases for aviation fuel storage
facilities,liquefield petroleum gas storages...
Hambantota port
Coco
island
Gwadar Port
Pearl Necklace
Strategy to India

Foreign Direct Investment
• Now many firms prefer to enter international market through
ownership and control of assets in host countries. Other firms
may first gain knowledge of and expertise in operation in the
host country, and then expand in the market through
ownership of production or distribution facilities.
• FDI affords the firm increased control over its international
business operations, as well as increased profit potential.
• FDI exposes the firm to greater economic and political risks
and operating complexity, as well as the potential erosion of
the value of its foreign investment if exchange rates change
adversely.

Marketing factors
!. Size of Market
2. Market growth
3. Desire to maintain share of market and to follow competition
4.Desire to advance exports of parent company
5. Need to maintain close customer contact and following them
Cost factors
1. Desire to near labor and lower labor cost
2. Availability to raw materials/capital/technology
3. Lower transport cost
Barriers to trade
1. Government-erected barriers to trade
2. Preference of local customers for local products
Investment Climate
1.Political stability / Tax structure/ Currency exchange regulations
2. Limitations on ownership
Major Determinants of
Foreign Direct Investment
(FDI)

The firm and Its Competitive Advantages
Change the Advantages Exploit Existing Competitive Advantages Abroad
Production at Home Exporting Production
Abroad
Licensing Management Contract Control Assets Abroad
Joint Venture Wholly Owned Affiliate
Greenfield Investment M&A Foreign Enterprises
1 step
2 step
3 step
4 step
5 step
Source: Adapted from Gunter Dufey &R. Mirus, University of Michigan
1985
The DFI Decision Sequence

In November 2003, TCL, the top 6th Chinese
Electrical Appliances Producer costs € 220 million
merged the television manufacturing business with
the French consumer electronics giant Thomson,
thus forming the world's largest color TV
enterprises of TTE Europe, with estimated annual
sales of $ 3.5 billion, TV shipments to more than 18
million units. TCL accounted for 67% of the shares
of the combined company.
Before the joint venture, Thomson loss of € 100 million, For
answering the arguments, Mr. Li Dongsheng, TCL chairman
explained: if it is profitable, it will have no the TCL anything,
but this loss gave an opportunity to TCL for the European
market entrance. The Chinese market has long been open,
how to get the advantage of competition? The attack is the
best defense – if the others use global resources to fight
you, it is difficult to defense with regional resources only.

For acquisition of Thomson, TCL Group continually
losses for two years in 2005, 2006. In April 2007,
TTE Europe filed for bankruptcy liquidation.
On March 10, 2011, the Commercial Court of
Nantes, France, made the first order of court
decision, the TCL Group, TCL Multimedia and its
four wholly-owned subsidiary should pay € 23.1
million in compensation to the statutory liquidator of
TTE European (about RMB 211 million).
The announcement of TCL Multimedia and TCL
Group Annual Report, the Commercial Court of
Nantes, France, will make the judgment of the
second writ in that year , which claims the amount of
up to 34 million euros.
Li Dongsheng said: Chinese enterprises have to go
out whenever sooner or later, and go early is better
to go late. This process is bound to be difficult. For
TCL acquired Thomson, Alcatel, but we can not stop
to internationalization, each way has its risks, the
business war means that the risk of intense.

Methods for FDI
1
Greenfield strategy:
building new facilities
;the word green-field
arises from the image of
starting a virgin green site
and then building on it
3
Joint Venture:
creating when two
or more firms agree
to work together
and create a jointly
owned separate firm
to promote their
mutual interests
2
Acquisition strategy:
buying existing assets
in a foreign country;
the purchaser quickly
obtains control over
the acquired firms’
factories, employees,
technology, brand
names and distribution
networks

The Greenfield Strategy
Advantages :
• The firm can select the site that best meets its needs and
construct modern, up-to-date facilities.
• The firm can start with a clean slate.
• The firm can acclimate itself to the new national business
culture at its own pace, rather than having the instant
responsibility of managing a newly acquired, ongoing business.

The Greenfield Strategy
Disadvantages :
• Successful implementation takes time and patience.
• Land in the desired location may be unavailable or very
expensive.
• The firm may be more strongly perceived as a foreign
enterprise.

The Acquisition Strategy
Advantages :
• It is quick to execute.
• In many cases firms make acquisitions to preempt (move faster
and early than) their competitors.
• Maybe it is less risky than Greenfield.

Disadvantages :
• The acquiring firm assumes all the liabilities—financial,
managerial, and otherwise—of the acquired firm.
• The acquiring firm usually must also spend substantial sums
up front.

Why do acquisitions fail?
• The acquiring firms often overpay for the assets of the
acquired firm.
• A clash between the cultures of the acquiring and acquired
firm.
• Attempts to realize synergies by integrating the operations of
the acquired and acquiring entities often run into roadblocks
and take much longer than forecast.
• Inadequate pre-acquisition screening.

As the big giant of the world's retail industry, Wal-Mart's
annual sales are four times the world's second largest
retailer Carrefour. Different with Carrefour to merge Costco
and opening his new branches of Costco in Japan grand
and lively,
After four years of study, Wal-Mart decided into Japan
through a partner. After the search, the target is Japan's
fourth largest retail - Seiyu Ltd.
Enter the Japanese market through cooperation with Seiyu
in 2002, Wal-Mart made a low profile, regardless of name
or store, do not have a local Wal-Mart's logo. In December
2003, Wal-Mart held the shares of Seiyu has reached 38%
(2002 entry only held 6%). In November 4, 2005, holding of
shares in Seiyu to 56.56%. Wal-Mart in 2007 spent $ 873
million to acquire of the remaining shares of Seiyu.

China Capital Steel Corp.
acquired a state owned Iron
ore company – Hierro
Company in 1992. It was a
good deal. The company
covered 582 km2 area with
estimated 1.6 billions tons
iron ore reserve.
Chinese acquirer was
suffered the loss for 15
years due to the strikes
Which was organized by worker’s union and different
cultures.
The company started to make money in 2007, $170
million. The reason is not only by the ore price increasing
but the managers understood how to run an oversea
company appropriately.

Joint Venture
Advantages :
• May facilitate entry into a foreign market.
• Allow firms to share the fixed costs (and associated risks) of
developing new product or processes.
• A way to bring together complementary skills and assets that
neither company could easily develop on its own.
• It can make sense to form an alliance that will help the firm
establish technological standards for the industry than will
benefit the firm.

Joint Venture
• But alliances have risks, and one key to making a strategic
alliance work is to select the right ally.
• The characteristics for a good ally
1.help the firm achieve its strategic goals
2. share the firm’s vision for the purpose of the alliance
3.unlikely to try to opportunistically exploit the alliance for
its own ends

Joint Venture
How to select a good partner
• Collect as much pertinent, publicly available information on
potential allies as possible.
• Gather data from informed third parties, including firms that
have had alliances with the potential partners, investment
bankers who have had dealings with them, and former
employees.
• Get to know the potential partner as well as possible before
committing to an alliance. This process should include face-to-
face meetings between senior managers to ensure that the
chemistry is right.

Haier set up a joint venture with Jordan made his product into the U.S. market
Haier negotiated with the MEC of Jordan in
December 2001. Haier invested $ 5 million to set up
a joint venture ‘Haier Middle East Trading Company’
with MEC. the two sides began to the construction of
the Haier products manufacturing plant in 2002.
The mature sales network of Jordan MEC helps
Haier to quickly open up its business in the Middle
East market. At the same time, Haier Jordanian
exports their products to the U.S. market enjoys the
zero-tariff preferential policies. Haier products are
exported to the United States finally.
Springboard

The international Entrance by
E-Commerce
B2B or B2C marketing
initially focused on
domestic sales, but
unexpectedly, the foreign
customer orders coming
and resulting in the
concept of Internet
marketing (IIM)
For instance: Dell
Amazon
Shipments through
international freight
services company or
express such
UPS,DHL,TNT,FEDEX,E
MS,NHK.
Xsdot is a web development company that occupies itself with the dev
elopment of internet, intranet, extranet, e-commerce and custom web
based applications.

Exporting
Contractual Agreements
International Investment
Degree of
Risk &
Management
Control for
the Profit
High
Low
Internet
The Comparison of the Four Different Modes of international Entrance

Mode Primary Advantage Primary Disadvantage
Exporting Relative low financial exposure Vulnerability to tariffs and NTBs
Permit gradual market entry Logistical complexities
Acquire knowledge about local market Potential conflicts with distributors
Avoid restrictions on foreign investment
Licensing Low financial risk Limited market opportunity/profits
Low-cost way to assess market potential Dependence on licensee
Avoid tariffs NTBs restrictions on foreign
investment
Potential conflicts with licensee
Licensee provides knowledge of local market Possibility of creating future
competitors
Franchising Low financial risk Limited market opportunity/profits
Maintain more control than with licensing Dependence on franchisee
Franchisee provides knowledge of local
market
May be creating future competitors
Low-cost way to assess market potential Potential conflicts with franchisee
Avoid tariffs, NTBs, restrictions on foreign
investment
Advantages and Disadvantages of Different Modes of Entry

Advantages and Disadvantages of Different Modes of Entry
Mode Primary Advantage Primary Disadvantage
Contract
Manufacturing
Low financial risk Reduced control (may affect quality,
delivery schedules, etc.)
Minimize resources devoted to manufacturing Reduce learning potential
Focus firm’s resources on other elements of the
value chain
Potential public relationship problems-
may need more monitor working
conditions, etc.
Management
contract
Focus firm’s resources on its area of expertise Potential return limited by contract
conflicts with licensee
Minimal financial exposure May unintentionally transfer proprietary
knowledge and techniques to
contractee
Turnkey project Focus firm’s resources on its area of expertise Financial risk (cost over runs, etc.)
Avoid all long-term operational risk Construction risks (delays, problems with
supplies, etc.)
Foreign Direct
investment
High profit potential
Maintain control over operations
High financial and managerial
investments
Acquire knowledge of local market Higher exposure to political risk
Avoid tariffs, NTBs Vulnerability to restrictions on foreign
investment

IBM _ Unit VI _ Modes of Entry.ppt

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