THURSDAY November 14, 2013
What tare the basic decisions firms make when expanding globally?
Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
Relative to other firms, do you want to be the first company to be in or you
want to wait for other firms. Do you want to be big or small?
3. Which entry mode to use.
How do firms enter foreign markets?
Basic entry modes:
Exporting: you just manufacture where you are and just ship it’s normally
Turnkey: it’s a mode of entry goes in and builds a
Example: when Middle East was opening up for oil they didn’t have much
experience like US or Britain they get a company that has done before and
build the whole place and then they hand in the key.
Licensing: the other company gets the permission to
Typically manufacturing and cut tends to be royalties everyone that
manufacture and sells you get the profit
Franchising: if I have typical chain of industries, its very expensive for me
to expand so one option is to build everyone of those if I franchise I simply
let the franchisee buy the rights I give them processing information, as
long as they agree to very specific rules they get run as the parent rules.
Establishing a joint venture with a local company: very specific it’s a
standalone company, we create a third entity each of it own some
percentage of it. It’s jointly owned standalone company.
Establishing a new wholly owned subsidiary: a green field start up,
What influences The Choice of Entry Mode?
When you have series of group of people running the company they only have the
time to run, if you spread them thin,
What’s the best way to do it
Several factors affect the choice of entry mode including:
• Transportation costs:
Example: if you have to ship a car they are heavy or low value of weight but
transportation it’s important you have to decide if it’s expensive to transport
• Trade barriers:
Example: I want to export there is 40% tariff it’s going to be expensive add
into cost, foreign direct investment, the JCB case. • Political risks: if a country is politically unstable what modes of entry you do
not want to do: you wouldn’t want to put a lot of capital, or joint venture could
be risky, we can just export
• Economic risks: you don’t want to put too much on the table the kind of
money to build infrastructure you can export licensing
• Costs: so lets we are looking at selling a product in a country that has cheap
labor etc, it’s easier and cheaper to produce the product, not only produce
there and export , what if it’s a country with high cost of production we wont
produce there we would export someway where we can
• Firm strategy:
Other companies that might say we are not big enough we would just export
The optimal mode varies by situation what makes sense for one company and country
might not make sense for another.
What defines a market?
A place where goods and services are exchanged. It can be any region anywhere
where that actual action takes place, it can be a country it can be a region, it can vary.
If you look at the number of countries and number of markets there are hundreds out
Every one of the mode of entry each case one company might decide to go into a
country in one way and another might want to choose another each case they are right
each individual company is right in their own way.
Which foreign markets should firms enter?
The choice of foreign markets will depend on their long run profit potential
Every decision that you make in a company you are going to decide what’s going on
in the future investments
More stable things are the more you can say I feel more comfortable spending money
Are politically stable
Have free market systems
Have relative low inflation rates: if you have high inflation then your money
is worth less why would that be a concern for a business? It’s an indicator of
stability. You cant predict what’s going to happen. In Canada we have a goal to
have 2% plus minus inflation rate to the Canada Bank.
Have low public and private sector debt.
Less desirable markets:
Are politically unstable
Have command/mixed or command economies: because they have
government tells them what to do
Have excessive levels of borrowing:
Why do people stil invest in US?
They are the largest econmy in the world. Which market should firms enter?
The choice of foreign markets depend on the long run profit potential
Markets are more attractive when the product in question is not widely
available and satisfies an unmet need.
One attractive market are identified, the firm must consider the timings of entry
1. Entry is early when the firms enter a foreign market before other foreign firms.
Advantage: unique product people are going to be interested.
Disadvantage: spend a lot of money on learning lost of cost associated with it.
2. Entry is late when the firm enters the market after firms have already
established themselves in the market.
Advantage: you can go in there and know what your product is you can
compete on price.
Disadvantage: the market is already saturated you have to work on the
gaining the customers.
First mover advantages include:
The ability to preempt rivals by establishing a strong brand name
The ability to build up sales volume and ride down the experience curve
ahead of rivals and gain a cost advantage over late entrants.
What are the some reasons things get cheaper the more you produce?
Fixed cost, if I only produce one then you cant divide the cost and if you
produce more then you can divide the cost, managers learn how to run
these processes better, people and management on labor gets better, your
supply chain: they will give you a price for 10 for 100 and every one of the
price is going to be less per unit, cheaper for them their people going to get
more and more to do it. You get to use your fixed cost more effectively, the
more you are building the lower the cost of building, people are getting
better by making more.
Example: lets say we own a company we decide to sell in brazil have a
good market, we are the first mover then it’s going to be cheaper for us to
make more products with less cost, it gets us to be on the lower part of the
curve gives us a competitive advantage.
The ability to create switching costs that tie customers into products or
services making difficult for later entry to win business. : we want to see a
continuing customer revenue chain
Example: Itunes for apple we use that for the music and the apple
devices, 2. Extended warranties for the most part they are margin
enhancement, they have engineered the product they know when they are
First mover disadvantages include:
Pioneering costs arise when the foreign business system is so different
from that in firm’s home market that the firm must devote considerable
time, effort and expense to learning the rules of the game.
The cost of business failure if the firm due to it’s ignorance of the foreign
environment, makes some major mistakes The costs of promoting and establishing a product offering include the cost
of educating customers.
After choosing which market to enter and the timing of entry, firms need to decide on
the scale of market entry.
Entering a foreign market on a significant scale is:
• a strategic commitment that changes the competitive playing field
The decision has a longterm impact and is difficult to reverse.
Smallscale entry has the advantage of allowing a firm to learn about a foreign market
while simultaneously limiting the firm’s exposure to that market.
The stock market has a technical, in the market it’s more subjective, it can have a
dramatic on the stock market,
There are no “right” answers when deciding which markets to enter, and the timing
and scale of entry.
There are just decisions that are associated with different levels of risk and reward.
The most important thing is the analysis do the research.
The more risk you are ready to take on the higher the reward but also higher chance of
Tesco and Walmart: They make a lot of their revenue in the foreign market, they go
into different companies buy the whole chain.
Study of anthropology: they study civilization. They explain everything through
Tesco decided to go into US 2010
1. Tesco’s new store in the United sTates are called Fresh & Easy markets. Why
did Tesco adopt the new name for it’s store?
It’s not known that much , the name makes more sense, in America the cities
and urban areas people have certain thought about it they trust US companies.
2. Consider Tesco’s timings on entering the US market. Why Tesco waited to
enter the market until now? How might the decision to wait to enter the market
help Tesco succeed in the