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Chapter 12

MGCR382 Chapter 12 Notes - Strategies for Analyzing and Entering Foreign Markets.docx

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Management Core
MGCR 382
Nicholas Matziorinis

MGCR382 Chapter 12 Notes: Strategies for Analyzing and Entering Foreign Markets Foreign Market Analysis  To successfully increase market share, revenue, and profits, firms must normally 1) assess alternative markets, 2) evaluate the respective costs, benefits, and risks of entering each, and 3) select those that hold the most potential for entry or expansion Assessing Alternative Foreign Markets  Market potential – the decisions a firm draws from this information often depend upon the positioning of its products relative to those of its competitors. A firm producing high-quality products at premium prices will find richer markets attractive but may have more difficulty penetrating a poorer market. Conversely, a firm specializing in low-priced, lower-quality goods may find the poorer market even more lucrative than the richer market o A firm must then collect data relevant to the specific product line under consideration. In some situations, a firm may have to resort to using proxy data. Firms may also be concerned about the income distribution of the country o Firms must also consider the potential for growth in a country’s economy by using both objective and subjective measures. Objective measures include changes in per capita income, energy consumption, GDP and ownership of consumer durables. More subjective considerations must also be taken into account when assessing potential growth  Levels of competition – to assess the competitive environment, it should identify the number and sizes of firms already competing in the target market, their relative market shares, their pricing and distribution strategies, and their relative strengths and weaknesses, both individually and collectively. It must then weigh these factors against actual market conditions and its own competitive position o Most successful firms continually monitor major markets in order to exploit opportunities as they become available. This is particularly critical for industries undergoing technological or regulatory changes. Privatization has been coupled with the tumbling of regulatory barriers to entry and innovation, allowing firms to enter new geographic and product markets  Legal and political environment – a firm contemplating entry into a particular market also needs to understand the host country’s trade policies and its general legal and political environment. A firm may choose to forgo exporting its goods to a country that has high tariffs and other trade restrictions in favour of exporting to one that has fewer or less significant barriers o Government stability is an important factor in foreign market assessment. Some less-developed countries have been prone to military coups and similar disruptions. Government regulation of pricing and promotional activities may need to be considered. Care also often needs to be taken to avoid offending the political sensibilities of the host nation  Sociocultural influences – to reduce the uncertainty associated with these factors, firms often focus their initial internationalization efforts in countries culturally similar to their home markets o If the proposed strategy is to produce goods in another country and export them to the market under consideration, the most relevant sociocultural factors are those associated with consumers. Firms that fail to recognize the needs and preferences of host country consumers often run into trouble o A firm considering FDI in a factory or distribution center must also evaluate sociocultural factors associated with potential employees. It must understand the motivational basis for work in that country, the norms for working hours and pay, and the role of labour unions Evaluating Costs, Benefits and Risks  Costs – direct costs are those the firm incurs in entering a new foreign market and include costs associated with setting up a business operation, transferring managers to run it, and shipping equipment and merchandise. The firm also incurs opportunity costs. Because a firm has limited resources, entering one market may preclude or delay its entry into another. The profits it would have earned in that second market are its opportunity costs – the organization has forfeited or delayed its opportunity to earn those profits by choosing to enter another market first  Benefits – among the most obvious potential benefits are the expected sales and profits from the market. Others include lower acquisition and manufacturing costs, foreclosing of markets to competitors, competitive advantage, access to new technology, and the opportunity to achieve synergy with other operations  Risks – generally, a firm entering a new market incurs the risks of exchange rate fluctuations, additional operating complexity, and direct financial losses due to inaccurate assessment of market potential. In extreme cases, it also faces the risk of loss through government seizure of property or due to war or terrorism Choosing a Mode of Entry Ownership advantages – tangible or intangible resources owned by a firm that grant it a competitive advantage over its industry rivals. Assuming that local firms know more about their home turf than foreigners do, a foreign firm contemplating entry into a new market should possess some ownership advantage that allows it to overcome the liability of foreignness Liability of foreignness – reflects the informational, political, and cultural disadvantages that foreign firms face when trying to compete against local firms in the host country market Location advantages – factors that affect the desirability of host country production relative to home country production. Firms routinely compare economic and noneconomic characteristics of the home market with those of the foreign market in determining where to locate their production facilities. If home country production is found to be more desirable than host country production, the firm will choose to enter the host country market via exporting. Conversely, if the opposite is true, the firm may invest in foreign facilities or license the use of its technology and brand names to existing host country producers  Affected by many factors  relative wage rates and land acquisition costs are important, but firms must also consider surplus or unused capacity in existing factories, access to R&D facilities, logistical requirements, the needs of customers, and the additional administrative costs of managing a foreign facility. Political risk must also be considered  Government policies can also have a major influence. High tariff walls discourage exporting and encourage local production, while high corporate taxes or government prohibitions against repatriation of profits inhibit FDI  May also be culture-bound Internalization advantages – those that make it desirable for a firm to produce a good or service itself rather than contracting with another firm to produce it. The level of transaction costs is critical to this decision. If such costs are high, the firm may rely on FDI and joint ventures as entry modes. If they are low, the firm may use franchising, licensing, or contract manufacturing. In deciding, the firm must consider both the nature of the ownership advantage it possesses and its ability to ensure productive and harmonious working relations with any local firm with which it does business  A firm’s lack of experience in a foreign market may cause a degree of uncertainty. To reduce this uncertainty, some firms may prefer an initial entry mode that offers them a high degree of control. However, firms short on capital or executive talent may be unable or unwilling to commit themselves to the large capital investments this control entails  Firms that seek to exploit economies of scale and synergies between their domestic and international operations may prefer ownership-oriented entry modes  Firms whose competitive strengths lie in flexibility and quick response to changing market conditions are more likely to use any and all entry modes warranted by local conditions in a given host country Exporting to Foreign Markets  Advantages: firm can control its financial exposure to the host country market as it deems appropriate. Little or no capital investment may be needed if the firm chooses to hire a host country firm to distribute its products. In this case, the firm’s financial exposure is often limited to start-up costs associated with market research, locating, and choosing its local distributor, and/or local advertising plus the value of the goods and services involved in any given overseas shipment. Alternatively, the firm may choose to distribute its products itself to better control their marketing. If the firm opts for this approach, it is then able to raise its selling prices because a middleman has been eliminated. However, its investment costs and its financial exposure may rise substantially, for the firm will have to equip and operate its own distribution expenses, hire its own employees, and market its products  Exporting permits a firm to enter a foreign market gradually, thereby allowing it to assess local conditions and fine-tune its products to meet the idiosyncratic needs of host country consumers. If its exports are well-received, the firm may use this experience as a basis for a more extensive entry into that market  Proactive motivations – those that pull a firm into foreign markets as a result of opportunities available there. A form also may export proactively in order to exploit a technological advantage or to spread fixed R&D expenses over a wider customer base, thereby allowing it to price its products more competitively in both domestic and foreign markets  Reactive motivations – those that push a firm into foreign markets, often because opportunities are decreasing in the domestic market. Some firms turn to exporting because their production lines are running below capacity or because they seek higher profit margins in foreign markets in the face of downturns in domestic demand Forms of Exporting  Indirect exporting – occurs when a firm sells its product to a domestic customer, which in turn exports the product, in either its original form or a modified form. Some indirect exporting activities reflect conscious actions by domestic producers. In most cases, indirect exporting activities are not part of a conscious internationalization strategy by a firm. Thus, they yield the firm little experience in conducting international business. Further, for firms that passively rely on the actions of others, the potential short-term and long-term profits available from indirect exporting are often limited  Direct exporting – occurs through sales to customers – either distributors or end-users – located outside the firm’s home country. However, its subsequent direct exporting typically results from deliberate efforts to expand its business internationally. In such cases, the firm actively selects the products it will sell, the foreign markets it will service, and the means by which its products will be distributed in those markets. Through direct exporting activities, the firm gains valuable expertise about operating internationally and specific knowledge concerning the individual countries in which it operates. Increasing experience with exporting often prompts a firm to become more aggressive in exploiting new international exporting opportunities  Intracorporate transfers – sale of goods by a firm in one country to an affiliated firm in another o Account for about 40% of all U.S. merchandise exports and imports o MNCs constantly engage in such transfers in order to lower their production costs o Common in the service sector Additional Considerations  Government policies – export promotion policies, export-financing programs, and other forms of home country subsidization encourage exporting as an entry mode. Conversely, host countries may impose tariffs and NTBs on imported goods  Marketing concerns – image, distribution, and responsiveness to the customer may affect the decision to export. Often foreign goods have a certain product image or cachet that domestically produced goods cannot duplicate o Also influenced by a firm’s need to obtain quick and constant feedback from its customers  less important for standardized products  Logistical considerations – firm must consider the physical distribution costs of warehousing, packaging, transporting, and distributing its goods, as well as its inventory carrying costs and those of its foreign customers  will generally be higher for exported goods than locally produced ones o Firms choosing to export from domestic factories must ensure that they maintain competitive levels of customer service  Distribution issues – a firm experienced in exporting may choose to establish its own distribution networks in its key markets. A firm captures additional revenues by performing the distribution function. It also maintains control over the distribution process, thereby avoiding problems o Beginner firms often lack the expertise to market products abroad, so it will seek a local distributor to handle its products in the target market. Critical to success is this selection, which must have sufficient expertise and resources to successfully market the firm’s products  a firm must choose between an experienced local distributor and a less experienced one that will handle the firm’s products exclusively o Profitability and growth potential will be affected. Distributor must be compensated for its services, which will reduce the exporter’s profit margin. The exporter and distributor depend on each other to ensure that a satisfactory business relationship is established and maintained. If the host country distributor inadequately does its job, it is the exporter that will suffer o Exporter and importer may disagree on pricing strategies  exporter prefers lower retail prices/distributor favours higher prices. The exporter may want the distributor to market its products more aggressively/distributor may believe that additional sales will not cover the increased expenses Export Intermediaries Intermediaries – third parties that specialize in facilitating imports and exports. These specialists may offer limited services or they may perform more extensive roles Export Management Company (EMC) – a firm that acts as its client’s export department. Most are small operations that rely on the services of professionals. An EMC’s staff typically is knowledgeable about exporting details and frees the exporter from having to develop this expertise. The EMC may also provide advice about consumer needs and available distribution channels in the foreign markets  Some act as commission agents for exporters  handle details of shipping, clearing customs, and document preparation. In this case, the exporter normally invoices the client and provides any necessary financing it may need  Others take title to the goods  they make money by buying the goods from the exporter and reselling them at a higher price to foreign customers. Such EMCs may offer customer financing and design and implement advertising and promotional campaigns Webb-Pomerene association – group of U.S. firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws. First authorized by the Export Trade Act of 1918, a WPA engages in market research, overseas promotional activities, freight consolidation, contract negotiations, and other services for its members. It may also directly engage in exporting by buying goods domestically from members and selling the goods in foreign markets on the association’s behalf. Although such organizations were originally designed to allow smaller, related firms to cooperate in promoting exports, most are now dominated by larger firms. In general, WPAs have not played a major role in international business  fewer than 25 exist today, focused on raw materials International trad
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