Entry and Expansion

CHAPTER 11

ENTRY AND EXPANSION

Chapter Objectives

·  To learn how firms gradually progress through an internationalization process

·  To understand the strategic effects of internalization on the firm

·  To study the various modes of entering international markets

·  To understand the role and functions of international intermediaries

·  To learn about the opportunities and challenges of cooperative market development

Opening Case
An Accidental Exporter
Summary:
This case tells how Sauder Woodworking first starting exporting because of chance events, but then made a decision to become a serious exporter. It took some time and effort, but the company has become successful in exporting and has found that it can compete in the world market because of its efficiency and quality products.

Chapter Outline

I.  The Role of Management

A.  Dynamism and commitment of managers are essential for international operations

B.  A change in strategic direction is necessary

C.  Management must see the opportunities existing in international markets

1.  From foreign travel or living experience

2.  From unsolicited orders

D.  Must introduce an international orientation

II.  Motivations to Go Abroad (Table 11.1, page 352)

A.  Proactive Motivations

1.  Profit advantage

2.  Unique products

3.  Technological advantage

4.  Exclusive information

5.  Tax benefit

6.  Economies of scale

B.  Reactive Motivations

1.  Competitive pressures

2.  Overproduction

3.  Declining domestic sales

4.  Excess capacity

5.  Saturated domestic markets

6.  Proximity to customers and ports (physical and psychological distance)

Focus on Entrepreneurship
An International Bug
Summary:
This vignette describes how Tierra Dynamic successfully entered world markets. First, the company developed a bacteria that eats spilled hydrocarbons at an accelerate rate and then discovered a void in the world market for his product. Next the company identified locations needing cleanup and found local partners in those locations.

III.  Strategic Effects of Going International

A.  Service delivery may vary

B.  Government regulation compliance is different

C.  Communication with customers is different

D.  Company must be aware of its own strengths and weaknesses with respect to globalization

E.  Risk assessment changes

IV.  Entry and Development Strategies

A.  Exporting and Importing

1.  Indirect involvement by using an intermediary to deal with foreign customers or firms

2.  Direct involvement is usually chosen due to cost savings and the development of knowledge within the firm

3.  Some firms are born global firms that start out with an international orientation or quickly develop one

V.  International Intermediaries

A.  Offer many benefits (Table 11.2, page 359)

B.  Export Management Companies—specialize in performing international business services as commission representatives or as distributors

1.  Agent do not take title to goods but develops foreign business, sales strategies, and establish contacts for a commission

2.  Distributor purchases products and assumes the trading risk

3.  Compensation of EMCs

a.  Fee for activities performed as a retainer

b.  Price break for international sales

4.  Power Conflicts Between EMCs and Clients

a.  Once a foreign market is successfully penetrated, the client often wants to become a direct participant leading the EMC to not want to share information and power to make this more difficult

b.  Clear arrangements must be made and a good relationship developed to avoid or minimize conflict

C.  Trading Companies

1.  Japanese sogoshosha is the most successful trading company

a.  Mechanism and organizations to gather, evaluate, and translate market information into business opportunities

b.  Economies of scale in transportation and distribution

c.  Serve large international markets providing opportunities for counter trade

d.  Access to large quantities of capital

2.  Expansion of Trading Companies due to government support in other countries, but have not been used much in the U.S. despite the passage of legislation supporting them

D.  Private Sector Facilitators—supply knowledge and information, but do not participate in the transaction

1.  Other firms in the same industry

2.  Distributors of a firm that are already engaged in international business

3.  Banks and other service firms

4.  Chambers of commerce and other business associations

E.  Public Sector Facilitators

1.  U.S. Department of Commerce

2.  Small Business Administration

3.  Export-Import Bank

4.  State and local organizations

5.  Educational institutions

F.  Licensing—one firm permits another to use its intellectual property for a royalty

1.  Less risk of capital and no involvement with foreign customers

2.  Avoids host-country regulations

3.  Allows a company to test the market

4.  Avoids cultural problems

5.  Trademark licensing—permits the names or logos to be used on products made in foreign market

6.  May be creating own future competitor

Focus on Culture
TV Program Licenses are International
Summary:
This vignette describes how the world used to rely on American produced TV shows to fill their airtime because they did not have the ability to do so themselves. Now, however, many foreign TV producers are very successful and are exporting their shows or concepts to the U.S. market
Reality TV Shows Take Arab World by Storm
By ZEINA KARAM
March 3, 2004
BEIRUT, Lebanon (AP) - Reality TV has burst upon the Arab world, drawing huge audiences but firing up conservative outrage over the spectacle of young men and women flirting, hugging and dancing under one roof.
Young people from Iraq and Syria to Egypt, Kuwait and Yemen love these variations on "Big Brother" and "American Idol." Some religious scholars and politicians say they're sacrilegious.
Things got so heated this week that Saudi-owned MBC TV bowed to pressure from Islamic fundamentalists and the Bahrain Information Ministry and said it will suspend "Al-Rayes," its version of "Big Brother," less than two weeks into the show.
"Al-Rayes" featured 12 contestants living in a villa on Amwaj, a small island in the Gulf state of Bahrain. Each week one person was to be evicted from the house, with the last remaining tenant winning $100,000.
The critics weren't assuaged by the fact that male and female contestants slept in separate quarters and had prayer rooms.
The shows are testimony to the power of satellite television and slick Western production methods to overturn societal norms. The success of such imported shows exposes a widening gap between a younger generation and its conservative Muslim elders.
First through the Arab reality door - and into the teeth of conservative protest - was the Lebanese Broadcasting Corporation with "Star Academy," launched in December. It's based on a French show of the same name. Next up will be LBC's version of "Survivor."
In "Star Academy," 16 Arabs share a house north of Beirut and can be viewed 24 hours a day on a satellite channel as they cook, eat, sleep (in sexually segregated quarters) and attend sports, singing, music and dance classes.
Each week, one of two participants are voted out by viewers. The winner will be crowned April 2 and get a recording contract.
Lebanese restaurant owners complain business is off on Friday evenings when "Star Academy's" weekly prime-time segment airs. Parents worry about kids skipping homework to watch. A pregnant woman jokes that she hopes she doesn't deliver on a Friday night so as not to miss the show.
A Beirut butcher slicing lamb has his eyes focused across his packed shop on "Cynthia,""Bashar,""Bruno" and "Khalawi," participants in "Star Academy" who have become household names across the Arab world.
"It is exciting living with a group of boys and girls in one place, enjoying themselves, which makes us feel that we can enjoy our lives," says Hiam Ramal, 24, a university employee in conservative Egypt.
Rita Saba, a 33-year-old Lebanese social worker, says it's refreshing to see Arabs mixing convivially. "The participants are young, they're vibrant. You live their youth just by watching them."
The program gives young people in a divided and turbulent region a rare opportunity to get to know each other better. But it has also stirred rare levels of rage.
The dean of Kuwait's Islamic Law College, Mohammed al-Tabtabi, has denounced the "shamelessness" and "decadence" of "Star Academy" and called on Muslims to boycott it.
Mohammed al-Ohaideb, writing in the Saudi newspaper Al-Riyadh, calls it a "whorehouse" and a platform for "cheap and immoral behavior."
Web sites opposed to "Star Academy" have sprung up on the Internet. One site designed by a group of Arab Muslim youths, collects messages and articles opposed to the program.
"I am stunned by the corruption and blind imitation (of the West) on the program," read one message, signed Samir al-Houlouli from Bahrain.
Bader Nasser, a 16-year-old Kuwaiti high school student, disagrees.
"Banning people from watching it is not right," he said. "We have to be open-minded."
Roula Saad, producer and director of the program, refuses to respond the "sacrilege" charge. She says the station has not been pressured to stop the program and calls it "an enormous success in the entire Arab world."
Even some critics are hooked.
Karma Khirmeh, a 34-year-old Syrian who owns an agency to import domestic servants, thinks "It's a silly program."
"But I watch out of curiosity. You cannot but watch it."
Source: http://apnews1.iwon.com/article/20040303/D812NPJ80.html

G.  Franchising—granting the right by a parent company (the franchisor) to another, independent entity (the franchisee) to do business in a prescribed manner

1.  Internationally, the firm must be able to offer unique products or selling propositions

2.  Must offer a high degree of standardization, but be adaptable to local circumstances

3.  Growing fast internationally, but government intervention is a major problem

4.  Selection and training of franchisees is also a problem area

VI.  Local Presence

A.  Interfirm Cooperation

1.  Strategic Alliance is an informal or formal arrangement between two or more companies with a common business objective

2.  Reasons for Interfirm Cooperation

a.  For market development

b.  To share risks

c.  To share resource requirements

d.  To block and co-opt competitors

3.  Types of Interfirm Cooperation (Figure 11.3, page 369)

a.  Informal Cooperation—partners work together without a binding agreement

b.  Contractual Agreements—joint efforts in specific areas or for outsourcing

1)  Contract manufacturing

2)  Management contracts

3)  Turnkey operation

c.  Equity Participation—acquiring minority ownership in a company

1)  To insure supplier ability and to build working relationships

2)  For market entry and support of global operations

d.  Joint Venture—the participation of two or more companies in an enterprise in which each party contributes assets, has some equity, and share risk

1)  May be due to government policy or legislation

2)  May need the skills of the other partner

3)  May need the attributes or assets of the other partner

e.  Consortia—to combat the high costs and risks of research and development

4.  Managerial Considerations

a.  Must first find the right partner

b.  The more formal the arrangement, the greater the care that needs to be taken in negotiating the agreement

c.  The two cultures must be blended

d.  Must be able to adjust to changing market conditions

e.  Must consider government attitudes and policies

B.  Full Ownership

1.  Company may believe that no outside entity should have an impact on corporate decision making (ethnocentric view)

2.  Consider how important total control is to success

3.  Increasingly, the international environment is hostile to full ownership by MNCs

VII.  A Comprehensive View of International Expansion

A.  The level of managerial commitment influences the growth rate into international business

B.  Al the factors involved in the process of going international are linked to each other (Figure 11.4. page 375)