Marketing discussion
Alex smith
ch_4.pptx1
Chapter 4
Marketing 4220
International Sourcing, Logistics
& Transportation
Methods of Entry Into Foreign Markets
5/21/2015
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Methods of Entry Into Foreign Markets
Entering A New Market
Indirect Exporting
Active Exporting
Production Abroad
Other Issues
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Entering a New Market
Determining the appropriate method to enter a new market depends on several factors:
Size and growth of the market
Potential market share of the exporter
Type of product and marketing strategy of the exporter
Willingness of the exporter to get involved
Characteristics of the importing country
Time horizon considered
Entering a New Market
The company must decide whether market factors favor
Manufacturing abroad
Manufacturing at home
Active Exporting
Indirect Exporting
Entering a New Market
Active Exporting
Exporter actively participates in finding potential markets abroad.
Best option for large firms or firms with international experience.
Indirect Exporting
Exporter does not seek export sales.
Allows manufacturer to concentrate on domestic market and leave exporting to the experts.
Indirect Exporting
Export Trading Companies
Export Management Corporations
Piggy Backing
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Export Trading Company
An Export Trading Company [ETC] is a firm with offices in multiple countries that purchases goods in one country and resells them in another.
For the “exporter” selling to the ETC, as well as for the “importer” buying from the ETC, the transactions are domestic transactions, even though the goods eventually travel internationally.
Historically, the first ETCs were created in Britain, France, and the Netherlands to facilitate trade with India and Indochina. They were then created in Spain and Portugal for trade in South America. Following World War II, ETCs became popular in Japan as the country began to trade with the outside world. Today, they are almost exclusively Japanese: Mitsui, Mitsubishi, Marubeni, Itochu, etc.
Export Trading Company
ETC
in Country A
ETC
in Country B
Country A
Country B
Firm 1
Firm 2
ETC
Export Management Corporation
An Export Management Corporation [EMC] is normally located in the exporting country.
The EMC acts as a representative for the exporter abroad, but never takes title to the goods; it acts as a facilitator helping the exporter find buyers and earns a commission on the sale.
A sale through an EMC requires more exporter involvement; it has to ship the goods, invoice the importer, carry the risk of non-payment and has to manage parts of the transaction.
Export Management Corporation
Exporter
Importer
EMC
Exporting Country
Pays a
commission
Sells
Payment
Importing Country
Goods
Piggy Backing
Piggy-backing refers to the possibility of a small firm piggy-backing on another firm’s efforts to enter a foreign market.
For example:
A firm’s customer may open a manufacturing facility abroad and request that the firm continue to sell its products to that new facility. The firm ends up being an exporter, even though it never sought to enter that market.
A firm utilizes another company’s distribution channels abroad to sell its products. It uses another company’s experience to sell its products abroad.
In either case, the firm “piggy-backed” on the other’s strategy.
Large Company
Piggy Backing
Exporting Country
Main Company
Subsidiary
Suppliers
Importing Country
A large company sets up a subsidiary abroad and informs its suppliers that they now have to deliver products to the subsidiary as well.
Active Exporting Agent
An agent is typically a small firm or individual located in the importing country. The agent will act as a representative of the exporter. He or she will not take title of the goods and will earn a commission form the exporter.
The principal is the party (company) being represented by the agent.
An agent will represent multiple companies manufacturing products that complement the exporter’s products.
Active Exporting Agent
Exporter
Importer
Exporting Country
Pays a
commission
Sells
Payment
Importing Country
Goods
AGENT
Active Exporting Distributor
A distributor is typically located in the importing country. The distributor will purchase the goods from the exporter and does take title of them. It will then resell the goods for a profit.
In this relationship, there are two sets of invoices. One set of international invoices between the exporter and the distributor. The distributor then becomes the importer. The second set of invoices is between the distributor and its customer. The customer views this as a domestic transaction.
A distributor may carry products from competitors in the same field. Often, it will also service products and carry replacement parts.
Active Exporting Distributor
Exporter
Importer
Exporting Country
Payment
Importing Country
Goods
DISTRIBUTOR
/ IMPORTER
Goods
Payment
Active Exporting Legal Issues
Agents are typically very small, sometimes even one person, and thereby fall under the protection of labor law in many countries. This puts certain limits on the way contracts between agents and exporters can be worded and enforced. (See Chapter 5).
Distributors are typically much larger than agents and therefore fall under contract law.
Finally, certain countries have strict laws regarding the use of agents, sometimes even barring them altogether.
Active Exporting Marketing Subsidy
A marketing subsidiary is a foreign office of a parent organization. The subsidiary is a separate entity incorporated in the foreign country. It is wholly owned by the parent company.
The parent company sells products to the subsidiary in an international transaction. The subsidiary in turn will sell these products to customers in the foreign country.
The costs (and risks) associated with creating a marketing subsidiary are costly, but a subsidiary allows for greater control by the exporter.
Active Exporting Marketing Subsidy
Exporter
Importer
Exporting Country
Importing Country
Goods
MARKETING
SUBSIDY
Goods
Payment
Coordinating Direct Export Strategies
A firm can use two strategies in entering foreign markets through exports and both are appropriate:
A standardized approach, where it uses a single method of entry in all markets: agents, distributors or sales subsidiaries. This uniformity simplifies the management of international sales.
A tailored approach, whereby an agent is used in some countries, a distributor in others, and a marketing subsidiary in the remainder. The decision depends on the characteristics of the market and resources.
Difficulties arise when a firm decides to change strategies in a particular market. These long-term relationships are very important and ending any of them can be difficult and costly
Foreign Sales Corporations
Foreign Sales Corporations (FSCs) are not actually methods of entry but a means for U.S. companies to lower their income tax. The U.S. government allows companies to take a tax deduction when they create domestic subsidiaries that meet certain conditions:
The subsidiaries must have at least 95 percent of their assets and personnel devoted to export sales.
The exported goods must have at least a 50 percent U.S. content.
The World Trade Organization has ruled against FSCs, but as soon as a particular version is found illegal, they are resurrected under a different form.
Manufacturing Abroad
Contract Manufacturing
Licensing
Franchising
Joint Venture
Subsidiary
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Contract Manufacturing
A company enters into an agreement with a foreign company to manufacture its goods abroad. For example:
An American publisher may hire a British publisher to print books in Britain, instead of shipping them from the United States.
A French cement company may contract a Chinese cement manufacturer to sell cement under the French company’s name in China.
Contract manufacturing is a way for a firm to get its products in a foreign country, either when there are barriers to entry (quotas, for example) or when transportation costs are high.
Contract Manufacturing
Chinese Firm
French
Firm
French Customers
Chinese Customers
Agreement
No goods are transferred between companies.
The Chinese firm simply makes the goods for the French firm.
The goods are then distributed through normal distribution channels, under the French firm’s name.
Licensing
A company (the licensor) allows another firm (the licensee) to use its intellectual property in exchange for a fee (royalty).
The license can permit the use of a patented technology, trademark, brand name or trade secret. The licensor retains ownership of the intellectual property and the licensee must pay the licensor a fee every time it is used.
All intellectual property is at risk of being copied or “stolen” in countries where intellectual property is not well protected.
Having a licensing agreement does not increase that risk: companies intent on violating intellectual property do it without access to the licensor.
Licensing
Licensing Agreement
Indian
Firm
British
Firm
British Customers
Indian Customers
The British firm allows the Indian firm to use its intellectual property for the payment of a royalty.
No goods are transferred between companies.
Franchising
Franchising is similar to licensing but involves a “bundle” of intellectual property items. A firm (franchisor) will allow an entire business model to be used by another firm (franchisee) in exchange for royalties.
The intellectual property includes a large number of related trademarks, copyrights, patents, know-how, training and methods of operation.
Franchising works best for retail establishments requiring a uniform appearance for consumers, and is most popular with fast-food restaurants, such as McDonald’s, KFC or small business services such as UPS stores.
Franchising
American Franchisor
Chinese Investors
Chinese Franchisee
Chinese Consumers
Chinese investors provide capital and the American firm provides intellectual property to a franchisee that operates as a duplicate of the operations of the franchisor.
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Joint Venture
A joint venture (JV) is a firm created and jointly owned by two or three companies.
It is created when two or three exporters want to share the costs of investing in a facility abroad. Often the joint owners are companies manufacturing complementary product lines.
Sometimes, an exporter wants a local partner to provide capital and knowledge of the market. Some countries require local partnership for foreign investors.
Joint ventures work well while the relationship is strong. Unfortunately, the two entities will often grow in different directions over time and the joint venture will suffer.
Joint Venture
German
Firm
Finnish
Firm
Brazilian
Firm
Joint Venture in China
Chinese Consumers
A Finnish firm, a German firm, and a Brazilian
firm create a joint venture in China.
Joint Venture
An Italian firm creates a joint venture with a
Chinese partner to enter a Chinese market.
Italian
Firm
Chinese Firm
Joint Venture in China
Chinese Consumers
Subsidiary
A subsidiary (or wholly owned foreign enterprise -WOFE) is an independent company established in a foreign country but owned entirely by the exporting company.
A subsidiary allows the foreign firm to retain complete control of its foreign investment.
This strategy is normally followed by a well-established large company, as the costs associated with the creation of a subsidiary are very high.
Subsidiary
Chinese Firm
Algerian
Consumers
The Algerian subsidiary is owned entirely by the Chinese firm.
Algerian
Subsidiary
Other Issues
Parallel Imports
Counterfeit Goods
Foreign Trade Zones
Maquiladoras
Foreign Corrupt Practices Act
Anti-Bribery Convention (OECD)
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Parallel Imports
For a variety of reasons firms will sell goods in different markets at different prices, with different methods of entry, market characteristics and varying exchange rates.
Entrepreneurs will often buy the goods in the country with the lowest price, and then sell them in the country with the highest price. In order to do that, they buy from the normal distribution channel, but sell through alternative channels of distribution that are not the usual ones that the exporter would use.
This phenomenon is called “parallel imports” or gray market.
It is difficult for companies to fight these parallel imports, as they are due to market characteristics rather than strategic choices.
Parallel Imports
EXPORTER
Normal Distribution Channels
Alternative Distribution Channels
Parallel Importer
Sells
Buys
Country A
Country B
Consumers
Normal Distribution Channels
Counterfeit Goods
Counterfeit goods are copies of legitimate goods.
The products are being produced to imitate genuine goods and deceive consumers. These goods are almost always of much lower quality and priced less than the genuine goods.
Counterfeit goods can be tangible goods like watches, clothing or car parts, but also intellectual property such as films and software.
Western countries often accuse developing countries such as China and India of ignoring blatant counterfeiting, but counterfeits can be found in every country.
Foreign Trade Zones
Foreign trade zones (or free trade zones [FTZ]) are areas of a country that have a special Customs status deeming them “outside” of the country.
This means goods can be shipped to FTZs without paying duties or being subject to quotas.
It is only when the goods leave the FTZ and enter the country that they are subject to duty.
FTZs were created to encourage exporting and foreign investments.
Foreign Trade Zones
EXPORTER
Foreign Trade Zone
Country A
Country B
Duty Free
Duty
Collected
Duty
Collected
Customers
Customers
Maquiladoras
A maquiladora is a company in Mexico with a Customs status similar to that of an FTZ.
Goods from the USA can be imported duty free into the maquiladora, transformed and re-exported to the U.S.
Duty is only charged on the value added, not on the goods themselves.
Maquiladoras are now obsolete because of the North American Free-Trade Agreement, which eliminated duty between Mexico, Canada and the United States.
Foreign Corrupt Practices Act & Anti-Bribery Convention (OECD)
In several countries, the bribing of government officials is a common and accepted form of conducting business.
The Foreign Corrupt Practices Act (FCPA) of the United States attempts to eliminate the practice of bribery, by punishing the companies and the individuals paying the bribes.
The Organization for Economic Co-operation and Development (OECD) has implemented an Anti-Bribery Convention, which several countries have adopted and also criminalizes bribery practices.
