5 pages country analysis

CHAPTER 8 OUTLINE - Expansion Strategies and Entry Mode Selection

Deciding on the Int Entry Mode - Depends on the degree of overall control over operations and increase in risk. Decide whether to use middlemen or market directly to int consumers.

1. Indirect exporting: Least control, least risk

· Company sells its products to intermediaries in its home country, who then sell the product overseas.

· Middlemen - EMCs, ETCs, or agents and brokers.

· Pros : Company sells its products to a distributor with little investment and not having to learn about the market.

· Cons: However, it has least control over the 4Ps and thus no control over sales of the product.

2. Direct exporting

· In-house exporting expertise, usually an exporting department. No home country middlemen.

· Host country middlemen, distributors, retailers etc. are used.

· Pros: Provides more control over 4Ps in the target market & better protection of trademarks.

· Cons: But it is more risky and expensive than indirect exporting because of export department costs & costs of dealing with host country middlemen.

3. Licensing

· A more risky entry mode, with more control than exporting, and it involves a licensor and a licensee.

· The licensor offers the know-how and use of the brand name; the licensee, in turn, pays the licensor royalties.

· Pros: Licensor often does not require knowledge of the local market and may not even require any capital investment. Not exposed to risks or barriers in host country. Low cost, low risk way for top brands. Licensee benefits from strong brand name. There are two approaches to licensing:

1) Licensing without the name: When the quality of the licensee's product cannot be guaranteed, it is preferable for the products produced under license not to carry the licensor's brand name.

2) Licensing with the name: When licensors have confidence in the capability of the licensee, they are likely to allow the licensee to use their brand name when marketing the product.

· Cons: Licensee could damage licensor’s reputation or turn out to be a competitor.

4. Franchising

· Constitutes a principal mode of entry for the service industry.

· Franchisor gives the franchisee the right to use its brand name and all related trademarks and business know-how, and the franchisee pays royalties for these rights.

· Pros: Access to local markets, experiences less risk and a higher level of control over operations and the offering. Franchisee can leverage from strong brand name, saves time/ effort in set up as franchisor helps with promotions, training, etc.

· Cons: High setup fess as well as regular franchise fees, business’ reputation dependant on the franchise, less control for franchisee.

5. Joint venture

· Involves a foreign company creating a new company in conjunction with a local company to share capital, equity, and labor.

· Governments of low- and medium-income countries prefer this entry mode.

· Pros: Instant access to local market expertise, labor, infrastructure and influence such as government connections. The local company will benefit from a strong brand name, capital, know-how, etc. JVs encourage development of local expertise & market, and of the country’s balance of trade, assuming that the production can be exported abroad.

· Cons: possible creations of a knowledgeable competitor in the local partner. Less than 50% stake in the jv for foreign company’s stake.

6. Consortia

· Involve three or more companies joining forces to form a new company or brand.

· They are present where costs are very high, often in the area of research and development, or in areas where the government or the marketplace can control its activity.

7. Wholly-owned subsidiaries: Most control, most risk

· Companies set up wholly-owned subsidiaries if they can afford it, if they are willing to commit to the market in the long term, and if the local government allows it. A Wholly owned subsidiary is a separate business entity.

· Options are to develop the subsidiary or purchase an existing company.

· Pros: highest degree of control of all company operations.

· Cons: highest level of risk eg. nationalization issues.

8. Branch offices

· Branch offices are a part of the company, unlike Wholly Owned Subsidiary.

· In the target market, they are in charge of pricing, promotion and distribution of the product.

· Pros: a high level of control; however, they present a much lower risk.

9. Strategic alliances

· Agreements between companies - typically non-equity alliances; usually short-term.

· Strategic alliances can be Manufacturing, Marketing as well as Distribution alliances.

· Outsourcing: The strategic use of outside resources to perform activities that are usually handled by internal staff and resources.

· Pros – Costs savings, Comparable advantage

· Cons – Communication errors and time issues, Not a cultural fit, Loss of home country jobs leading to consumer ethnocentrism.