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Lecture 4

Lecture 4 PM (revised).docx

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McGill University
Management Core
MGCR 382
David Schumacher

steps to going abroad 12/2/2013 10:21:00 AM Coordination of environment and organization should come together to build a global competitive advantage Enviornmental factors:  Sociocultural  Poltical  Legal  Technological  Economic Organization  Structures  Leadership  Values  Systems Generic strategies  Home replication  Mulitdomestic  Global strategy  Transnational 3 essential steps to going abroad:  Figure out/analyze market  Cost benefit analysis  Choose a market (based on which holds the most potential for entry and expansion) Foreign Market Analysis 12/2/2013 10:21:00 AM Look for:  Market potential o Demographics:  Population size  Income spread  GDP  Public infrastructure o Market niches/geographical locations  High quality premium price product? Look for richer markets  Low quality low prie produce? Can sell in poorer markets o Potential growth for market  Emerging middle class? GDP growth?  What trends are seen in the economy?  Levels of competition o Both current and future levels need to be considered o When assessing, you must considerL  Size of previously established firms  Relative market shares of these firms  Pricing and distribution strategies  Relative strengths/weaknesses of these competitors o Technological industries need to constantly observe major markets in order to sieze all possible opportunities  Legal and political environment o Must understand trade policies and general political environment  Stable government? What kind of legistaltion? o Need to take care to avoid any negative political impacts  Ex. people’s republic of china does not recognize the republic of china (i.e. taiwain) as a separate nation  so if you are doing business with both you must be careful not to step on any toes  Sociocultural influences o Must take into account the needs, preferences, cultural differences of various markets in order to reach the consumers Potential Cost and Benefits 12/2/2013 10:21:00 AM Costs can be separated into 2 categories:  Direct o i.e. those the firm incurs when they enter into a new foreign market  start up costs  training new managers/employees  operating costs  transferring equipment/technologies  Opporunity costs o i.e. by entering this market you are giving up possible income opportunities in another  forfeit profits  i.e. profits you are giving up in Market A by entering market B  delay profits  when you start a new business there will always be a period in which you aren’t breaking even or even gaining capital Potential benefits:  Sales and profits o Economies of scale/scope  Foreclosing of market o Limits ability of competitors to earn a profit  New technology  Lower costs o Ex. labor costs o May have better resource availablility reducing your transportation costs  Competitive advantage  Synergy o Added value of objects when they are brought together as opposed to when they are separate entities Potential risks  Exchange fluctuations  Operating complexities  Direct financial losses o Ex. Nationalization  Expropriation  Confiscation o Fall in market prices  Political instability o Nationalization again Choosing and entry mode 12/2/2013 10:21:00 AM Dunnings eclectic theory comes into play when deciding whether or not to go abroad  Says you must satisfy 3 requirements in order to go abroad o Internatlization advantage  Influential factors:  Transaction costs  Need for control o Ownership advantage  Tangible/intangible factors that give the company a competitive advantage in foreign market  Needed to overcome liability of foreigness  You are already at a competitive disadvantage by entering a market that has different political, local, cultural factors then you  Primary determinantes of bargaining strength o Location advantage  Dictate the desirability of the foreign market  If home country is more attractive then the firm will stick to exporting  Influencing fators:  Labor costs  Land acquisition costs  Access to R&D  Cost of managing foreign facility  Needs of customers  Political/legal environemtn  Will determine if your chosie among” o Home country production (exporting) o Host country production in firm owned factories (FDI and joint venture)  Common for pharmaceutical companies o Or host country production performed by others (franchising and leasing) Decision factors determining which entry mode to use:  Ownwership  Location  Internalization  Need for control  Available resources  Global strategy  when selecting an entry mode is it important to consider the following factors of success:  linguistic and cultural differences  quality and local training  business and regulatory relationship understanding  experience and compatability of parents in joint ventures 4 key entry modes Exporting  Benefits: o Effective and simple o Permit gradual market entry o Control financial exposure  Avoid restrictions of foreign investments  Don’t actually have to risk putting money into foreign maret because all operations are done outside foreign country o Trade officers can help find distributors  Disadvantages o Vulnerability to tariffs and NTBs o Logistical complexities o Lack of control leading to conflicts with distributors  Hard to monitor how distributors are getting your products out on the market o No learning involved  Will learn about market, but not to the extent of other methods  Motivations: o Proactive- things that PULL a firm into foreign market due to opportunities present in foreign market o Reaction- things that PUSH a firm into a foreign market due to lack of opportunities in home market  3 kinds of exporting: o Indirect  Sells product to firm in own home country (domestic firm) who will then ship it to another one  Not internalized therefore, the company doesn’t learn  Ex. US firm buys the intel chip from the company. US firm them puts that chip into their own computer and exports that around the world  The chip was the original product that is now in a new form and is indirectly exported o Direct  Occurs through sale to customers by distributors or end users in firms HOME country  Allows learning of how to operate internally or about individual companies o Intracorporate transfer  Requires subsidiary in foreign country  transfer produts from one branch in home country to another subsidiary of company in another country  Sale of goods by a firm in one country to an affiliated firm in antoher country  Allows them to use productive capacity of both domestic and foreign factories more efficiently  i.e. build parts in different regions and ship them to the same area to be fully put together  most integrated form  best ability to control distribution  additional income is received to parent company through domestic distributors  disadvantages:  distributors are not tied to one company, so they may be distributing your competitors stuff and whos to say they don’t treat their stuff better than yours?  Must weight the benefits and risks of using an established distributor who may also be that of your competitors or finding a new distributor who lacks the same expertise  concerns for exporting: o governmental policies  do they promote export? Many NTB or tariffs? o Logistical considerations  Network cost of warehousing  Shipping costs  Packaging  Inventory carrying costs o Marketing concerns  Image is everything in certain markets, and by exporting you lose all control over your product  But exporting may be a way of preserving your image  Ex. Swiss watches – if they were made in china they wouldn’t be the same thing  Export Intermediaries: rd o Separate 3 parties that specialize in facilitating imports and exports o 3 kinds:  Export management company  Either separate company or unit within existing company that specializes with selling and performing sales to foreign markets  Only does exporting  2 ways of operating:  commission agents for exports o deal with the logitics for exporting in return for a fee  title to the goods o exporters buy good from company and make profit by selling product to foreigners at a higher cost  Webb pomerene association  Government regulators that make it possible for firms to collaborate their exporting activities in specific industries  Does promotional activities, engages in ocntract negotiations, exports goods for members, oversees freight consolidation  International trading company  Firm directly engaged in import/exports  Most sophisticated than EMC  Does BOTH imports and exports as opposed to only exports (like EMC’s)  Also does: o Research o Transportation o Documentation o Distribution o Financing o marketing  Typically buys product from company and exports it under their own name o Other export intermediates:  Manufactuers’ agents  i.e. solicit domestic orders for foreign manufactuers on a commission basis  Manufacturers’ export agents  Act as foreign sales rep for domestic firms selling goods in foreign market  Freight forwarders  Logistical companies who organize large warehouses  i.e. ones who do the physical transportation of goods  Ex. FedEx UPS  Export and import brokers  Bring together international buyers and sellers of commodities Licensing  A firm (licensor) leases the rights to use its intellectual property (technology, brand names, trademarks, copyrights, patents etc) to another firm (licensee) for a fee  Must ensure foreign market has proper intellectual property protection or else company could risk losing it to copycats  Issues: o Boundaries of agreemnt o Methods of compensation  Compensation = royalties  Can be a flat fee or % of sales o Rights, privileges, and constraints  Most important aspects  defines what will happen after the end of agreement to insure that the IP remains protected o Duration of agreement  Advantages: o Low financial risk  Encouraged for markets that have high tariffs or NTBs o Market assessment o Sales opportunities  Learn from licensor without taking the financial risks  Disadvantages o Limited opportunities  Have to share profits with licensee  Licensee and licensor depend on each other to maintain product quality and promote the products brand image o Potential litigatio
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