MARKET ENTRY & SERVICING

STRATEGIES
CHAPTER 9
INTERNATIONAL M&A DATA
Rank Industry Number Value (billion USD)
1 Metals & Mining 48963 3060
2 Professional Services 46900 1094
3 Other Financials 35446 1388
4 Food & Beverage 34577 2326
5 Software 34362 1049
6 Building/Construction/Engineering 33208 758
7 Oil & Gas 32903 4891
8 Banks 27932 5072
9 Transportation & Infrastructure 27577 1995
10 Machinery 26093 891
KEY QUESTIONS?
How firms can service foreign markets through indirect exports (via third
parties) or using direct exporting.
The ways that companies can contract with foreign firms to use home market
technologies or marketing methods to produce goods or services in foreign
countries.
What investment options are available to companies to manufacture in
foreign markets, including joint ventures (usually with local partners), mergers
and acquisitions, and custom-building their own subsidiaries.
What factors determine the choice of market entry and servicing strategy.
MEANS OF MARKET ENTRY & SERVICING STRATEGIES

Contractual Methods
Licensing Investment Options
Franchising International Joint-
Exporting Strategies Management ventures
Indirect Exporting Contracts Mergers & Acquisition
Direct Exporting Contract Greenfield Operations
Manufacturing Siting Research &
Co-production Development Facilities
Agreements
EXPORTING STRATEGIES
INDIRECT EXPORTING & USE OF TRADING COMPANIES
Many firms lack the resources, expertise, and market contacts to cover world
markets.
When this occurs, many turn to trading companies to get their products into
foreign markets and handle the intricacies involved in gaining market access.
Trading companies provide:
COMMERCIAL FOREIGN
CONTACTS TRADE EXPERTISE QUALITY CONTROL
FINANCING DISTRIBUTION

They vary in sizes from being very small to being very large
DIRECT EXPORTING

Where firms have expertise in dealing with foreign customers, and in

financing and shipping goods abroad, direct exports to overseas markets are
appropriate.
Direct exporting is beneficial as companies deal face-to-face with foreign
distributors and customers, learning as they go and building up international
expertise.
As markets develop and sales increase, marketing subsidiaries can be
established to enhance market contacts and customer relations.
SMALL & MEDIUM FIRMS EXPORTS

For small & medium companies, export is a cheap and flexible way to develop
foreign markets and to learn about customers.
Many use Internet to gain international access.
Advantages of Internet powered trade???
A disadvantage of Internet-based exporting has been its limited ability to
conduct the more sophisticated international business transactions.
LARGE FIRMS EXPORTS

Global export strategies are used in industries where there are significant
manufacturing scale economies.
In these cases, global production is centralized to service world or regional
markets.
Autos, medical equipment, and machine tools all use export-based strategies
as they use a single production site to serve multiple markets.
In addition, industries with country-specific production advantages (French
wines, Indian or Chinese teas, Italian fashions) place great reliance on export-
based strategies.
DOCUMENTATION REQUIRED FOR EXPORTS 1
International Proforma Invoice: a quotation to a prospective buyer. Outlines
the price of goods, cargo weights and dimensions, export packaging charges,
inland freight costs, freight-forwarders fee, dock and loading charges, and
ocean freight and insurance costs.
International Purchase Order: The importer uses the export quotation to
arrange financing either in shape of an open letter of credit at the importers
bank or a bill of exchange in favor of the exporter. Export quotations are also
used to get import licenses.
The exporter receives the international purchase order, packs the goods, and
often uses a freight forwarder to ship to the port and onto a carrier.
DOCUMENTATION REQUIRED FOR EXPORTS 2

Responsibility for the cargo is transferred to the trucking company via an inland bill
of lading.
At the port, the cargo is inspected and transferred to a cargo vessel that issues a
clean on board bill of lading specifying that the goods have been safely placed
onboard ship.
The exporter or freight-forwarder collects the ocean bill of lading, the international
commercial invoice (issued by the exporter), and other required documents.
These may include packing lists (to facilitate customs clearances and prevent
pilferage); insurance certificates; certificates of origin, (to verify place of
manufacture for import duty assessment), and other, often industry-specific
documents.
DOCUMENTATION REQUIRED FOR EXPORTS 3

The importer is notified when the goods arrive.

The importer goes to the bank, pays or signs for the goods, collects the title
documents, and retrieves the goods at the port, paying the necessary duties.
The importers bank pays the exporters bank, which then pays the exporter.
DOCUMENTATION REQUIRED FOR EXPORTS 4
Letters of credit are used when exporters and importers do not know each
other very well, or where there might be payment difficulties.
On placing the order, the importers bank opens an unconfirmed irrevocable
(i.e., unchangeable) letter of credit in favor of the exporter.
This specifies that the importer has the funds and credit to pay for the
shipment.
This document then goes to the exporters bank which, for a small fee, will
check the importer, the importers bank, and hard currency availability in the
market, and, if all is in order, issues a confirmed irrevocable letter of credit.
This is the safest of payment mechanisms.
DOCUMENTATION REQUIRED FOR EXPORTS 5

Bills of exchange are reverse checks requiring payment and are issued
through international banks.
They may be payable immediately (a sight draft) or after a specified period (a
time draft).
These are used when exporters and importers know each other and mutual
trust exists.
CONTRACTUAL METHODS
OF MARKET ENTRY &
SERVICING
CONTRACTUAL FORM OF MARKET ENTRY

Many firms find contractual modes of international business convenient

means of servicing foreign markets.
Under these arrangements, a company contracts with a foreign firm to render
a service to that firm in a particular country or group of markets.
The three most popular methods are licensing, franchising, and
subcontracting production (outsourcing).
LICENSING

Licensing allows a foreign-based firm to use a companys production

processes, marketing logos, trademarks, or brand names for a defined time
period in specific markets and for a pre-specified royalty fee.
Companies use licensing to gain swift access to markets but without
significant upfront investments.
FRANCHISING

Franchising is similar to licensing except that there is less freedom for the
franchisee than there is for a licensee.
Franchisers exert considerable control over both the production process (with
operating manuals, procedures, and quality standards) and marketing strategy
(how the product or service is presented to customers).
Franchising is a useful strategy where rapid international expansion is needed,
but it requires significant amounts of investment capital.
TWO ISSUES WITH FRANCHISING (CONTROLLING
FOREIGN FRANCHISES)
There are two different ways for head offices to manage control issues over
affiliates.
They can either allow master franchisers to manage a number of franchisees
simultaneously and give themselves fewer owners to control, or they can
reduce the power of individual franchisees by not giving any individual more
than a single business.
The master franchiser strategy concentrates ownership by having individuals
supervise and develop a number of franchises within a country or region.
Master franchisers are usually wealthy local business people who can afford
to buy numerous franchises and exercise centralized control over market
development, including the recruitment and training of individual franchise
entrepreneurs.
TWO ISSUES WITH FRANCHISING (MANAGING LOCAL
PROBLEMS)

The second problem international franchisers face is dealing with local market
environments, including archaic legal frameworks and bureaucracies, political
unrest, and major cultural differences.
MANAGEMENT CONTRACTS

Management contracts are agreements whereby international companies, for

a fee, train local employees and manage foreign-based facilities for a
prescribed time period.
Such contracts often include the setting up of foreign affiliates and include
technical help in getting facilities up and running.
CONTRACT MANUFACTURING 1

Contract manufacturing involves foreign firms using specific materials or

processes to manufacture products or provide services at pre-certified quality
and cost levels for third-party companies.
Offshore manufacturing has flourished as developing countries in particular
have embraced free trade principles and encouraged export manufacturing.
International firms, confident in their abilities to subcontract production while
maintaining control over product development and marketing activities, have
increased corporate dependencies on contract manufacturing in foreign
markets.
CONTRACT MANUFACTURING 2

Contract manufacturing has become prominent in automotive and electronics

industries, sports and leisure equipment (e.g., Nike, Reebok), retail apparel
(Body Shop, Laura Ashley), and other sectors.
Indeed, contract-manufacturing organizations (CMOs) have emerged as the
production arms of many well-known international corporations.
ADVANTAGES OF SUBCONTRACTING

Flexibility
Cost Advantage
Manufacturing Expertise
Resource Outlays
Continuous Improvements
Relationship Advantages
DISADVANTAGES OF SUBCONTRACTING

Responsibilities for subcontractor behaviors

Creating of future competitors
Poor quality control
Changing parent company corporate culture
COPRODUCTION AGREEMENTS

Coproduction agreements are manufacturing joint ventures, with partners

retaining their independent marketing and distribution rights.
U.S. company GE Silicones and Japans Shin Etsu Chemical entered into a
coproduction agreement to build and operate a plant in Thailand to supply
key ingredients for both firms silicone products businesses in Asia.
INVESTMENT OPTIONS
INTERNATIONAL JOINT-VENTURES

Joint ventures occur when international corporations and local firms join
forces to share ownership and management responsibilities in specially
created enterprises.
Joint ventures are mandated by the law in some countries/sectors like China
and Saudi Arabia and in power sectors.
Typically for most IJVs, local partners provide market knowledge, familiarity
with government regulations, local manufacturing facilities, and a trained
workforce. Foreign partners bring process and product technologies,
management expertise, capital, and access to international markets.
KEY ISSUES IN IJV NEGOTIATIONS

Equity structure foreign dominance vs local control

Technology transfer IP protection vs transfer of technology
Asset valuation asset procurement vs asset rentals
Management Responsibility Division micromanagement vs autonomy
Financial/Strategic Objectives profit retention or dividend payout
MERGERS & ACQUISITIONS (SEVEN BEHAVIORS)

Carnivores M&A is an everyday activity. The actively seek out matches to

merge with or acquire. e.g. Nestle, Unilever and P&G. they assimilate relevant
segments of acquired companies and sell off the irrelevant ones.
Dairy Farmers buy or sell to increase shareholders wealth. They impose
planning and financial discipline but allow operational freedom.
Vegetarians acquire only when useful in the long-term strategy. Short-term
motives are hard to ascertain.
White Hunters old-style corporate raiders who buy out larger firms with
weak managements. After purchase, they break up the firm and sell of the
pieces.
MERGERS & ACQUISITIONS (SEVEN BEHAVIORS)

Gentlemen Shooters make large acquisitions after careful groundwork.

These are non-hostile mergers. BMWs acquisition of Rover.
Cross Breeders mergers that bind together an international and a local
powerhouse into one global leader. Asea of Sweden merged with Brown-
Boveri of Switzerland.
Global Megamergers two global companies merge to become even bigger.
Mercedes merging with Chrysler. Citibank merging with Travellers.
M&A IMPLEMENTATION STRATEGY

Evaluation Post-
M&A
of acquisition
assessment
Prospects strategies
EVALUATION OF PROSPECTS

Step 1: financial analysis to assess performance levels

Step 2: SWOT analysis
Step 3: Cost and value chain analysis to evaluate the pricing structures and
margins.
Step 4: Competitive analysis identifying strategies required if the merger goes
ahead.
POST-ACQUISITION STRATEGIES

Stand-alone option: leave the acquired company alone. Done if the acquired
company is more experienced than the acquiring company. Done if there is
nothing to gain from merging operations or strategies.
Integration option: for many acquirers, though, some degree of integration is
necessary. For the integration to occur smoothly, differences in corporate
cultures and modus operandi should be evaluated and differences bridged
between the two companies.
ASSESSING ACQUISITION

Did the acquisition reinforce corporate positions in core businesses?

In retrospect, was the price of the acquisition excessive?
Was the strategic evaluation of the acquisition correct?
Has the parent company been able to leverage the acquisitions assets and
products successfully in the marketplace?
How well was the post-acquisition strategy managed? Was the integration
process smooth?
GREENFIELD OPERATIONS
GREENFIELD OPERATIONS 1

Greenfield operations occur when firms opt to custom build foreign

subsidiaries to suit their needs.
The advantages of building versus buying (i.e., M&A) are:
first, not having to deal with existing managements and facilities built for other
purposes;
second, being able to start fresh in a market with the firms own technologies,
management styles, and corporate cultures; and
third, greenfield operations give parent companies complete control of
subsidiary development and market strategies.
GREENFIELD OPERATIONS 2

The disadvantages are

having to build in-market relationships with suppliers and distributors from
scratch, which gives in-market competitors time to adjust their strategies and
prepare for a new rival, and
the risks of making major resource commitments and of financing losses until
facilities reach their full market potential.
COMPANIES GO FOR GREENFIELD OPERATIONS WHEN

Financing needs are low for example in service industries (e.g., advertising
agencies, accounting, consulting) where there are few or no major fixed investments
to be made in factories, equipment, and distribution.
Markets are developing slowly and industry competition levels are low (in emerging
markets, for example).
Firms have leading-edge products and process technologies and do not want to risk
intellectual property theft that can occur with acquisitions or joint ventures (e.g.,
high-tech firms).
Companies have global brands and reputations they can leverage into local markets
without outside help.