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Chapter 12 The firm’s market-entry strategies

Chapter 12 The firm’s market-entry strategies. EXPORTING ?. FRANCHISING?. TURNKEY?. DIRECT INVESTMENT ?. LICENSING ?. Lecture plan. The firm’s foreign business strategy Exporting Contracting (licensing, leasing etc) Joint ventures Wholly-owned company

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Chapter 12 The firm’s market-entry strategies

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  1. Chapter 12The firm’s market-entry strategies EXPORTING ? FRANCHISING? TURNKEY? DIRECT INVESTMENT ? LICENSING ?

  2. Lecture plan • The firm’s foreign business strategy • Exporting • Contracting (licensing, leasing etc) • Joint ventures • Wholly-owned company • Advantages and disadvantages of various market entries • Strategic FDI plan issues

  3. Export-import management Company business strategies • Domestic strategies – investment in product development – expand domestic market share – diversify into new industry. • Foreign business strategies – exporting – international contracting – foreigndirect investment/foreign production

  4. The firm’s foreign business strategy 1. JV = Joint Venture 2. WOC = Wholly-Owned Company Source: adapted from R. Grosse & D. Kujawa, International Business, Irwin, 1992

  5. Exporting • World exports of goods ($US8880 billion in 2004) have declined in relative importance compared to foreign production ($US17,580 billion in 2003). • Most likely mode for serving a foreign market for a domestic firm starting in international business. – the business plan (export marketing plan) – many global companies combine exports and FDI

  6. Exports: advantages • Least costly and risky – L/C payment • Specialisation, economies of scale. • Open to any size or kind of firm

  7. Exports: disadvantages • Production costs in the home country may be higher. • Transport costs may make exporting uneconomical. • Trade barriers in target markets • Divided loyalties of O/S agents

  8. Types of international exporters • Casual exporter • domestic firms that do not do international business on a regular basis (< 5% of T/O) • Small-scale exporter • 5–20% of turnover • Experienced/global exporter • high ratio of its turnover through involvement in worldwide business deals (exports + FDI)

  9. Licensing • Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment. • Time and territorial limits • Advantages: – speed of execution – low risk/investment cost – brand recognition – preliminary cooperation which may be expanded into FDI

  10. Licensing: disadvantages • Isolation from the market • Lack of managerial control • Limited life • Risk of technology loss

  11. Franchising • A franchisorsells limited brand use rights, products and services to a franchisee in return for a lump sum payment and a share of the franchisee’s profits. • 20% of US franchise systems have foreign operations (Japan, Canada, UK, Australia) - Domino’s Pizza vs Pizza Haven (200 in 7 years); - Dunkin’ Donuts vs Donut King • Low market entry costs and risks • Quality control is difficult due to big number of franchisees and geographic location.

  12. Subcontracting • Supply arrangement between a principal and a subcontractor • Advantages • low investment cost • speed • stable processing cost and quality • control of sales and marketing • can become the basis for later alliance • Disadvantages • risk of non-delivery or late delivery

  13. Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning Advantages high economic returns less risky than FDI Disadvantages lack of long-term market presence loss of control over technology client may turn into a competitor Turnkey operations

  14. Joint ventures • A legal entity jointly owned by two or more legally distinct organisations which share in the JV’s decision-making activities • Various options – 2 companies from the same country – foreign/local – 2 or more companies setting up a JV ina third country

  15. Joint ventures cont. • Advantages • partner’s local knowledge • cost/risk sharing • host government legislation • low risk of nationalisation • Disadvantages • technology control risk • less control over subsidiaries • management control conflicts

  16. Wholly-owned subsidiaries • A firm owns 100% of the stock • Trend in the motor-car sector (e.g. India, China) • Advantages • complete management control • optimum security for technology • ‘internalisation’ of operations • Disadvantages • high costs and risks • long lead time to first sale (especially for ‘Greenfield’ operations)

  17. China: joint ventures vs wholly owned Source: adapted from UNCTAD, World Investment Report 1999

  18. Strategic FDI plan issues • Investment location evaluation • see matrix on next slide • Strategic organisation • international group • business/product units • functional units • global matrix

  19. Investment location evaluation Source: Fig. 12.3, p.298

  20. Strategic FDI plan issues • Financial management and control • investment decisions • financing decisions • global money management • Global sourcing strategy • outsourcing • Global human resource strategies

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