Selecting and Managing

Entry Modes
 Chapter Preview

• Discuss the essential aspects of exporting

• Define each form of countertrade
• Describe the advantages and disadvantages of each
contractual entry mode
• Identify the pluses and minuses of each investment
entry mode
• Identify strategic factors in selecting entry modes

Chapter 13 - 2
 Entry modes:
Risk/Return ratio

Export

Contractual Modes

Investment Modes

Chapter 13 - 3
 Developing an Export Strategy

Step 1 Step 2 Step 3 Step 4

Identify a potential Match needs to Initiate Commit

market abilities meetings resources
Chapter 13 - 4
Degree of Export Involvement

Direct or Indirect exporting

(sell to buyers or intermediaries)

Sales representatives
Distributors
Agents
Export management companies
Export trading companies

Chapter 13 - 5
Avoiding Export Blunders

Conduct market research

Obtain export advice

Consider a freight forwarder

Chapter 13 - 6
 Forms of Countertrade

Barter Direct exchange without money

Counterpurchase Sale to a country in return for promise of future

purchase from it (specified product)

Offset agreement Offset a sale to a nation with a future purchase

of an unspecified product
Sale by a company of an obligation to purchase
Switch trading from a country

Export of industrial equipment in return for

Buyback products the equipment produces

Chapter 13 - 7
 Export/Import Financing
Trade always involves risk:
Pre-Historic Export/Import
Will he pay after I ship the product?
Risk Management:
Will he ship the product after I pay?
Holding a child hostage until
terms of agreement fulfilled
pay?

International Business Management Chapter 13 - 8

Contractual Modes

Licensing

Franchising

Management contract

Turn-key project
Chapter 13 - 9
 Licensing
Company owning intangible property (licensor) grants
another firm (licensee) the right to use it for a specified time

+ Finance expansion
+ Reduce risk
Advantages + Reduce counterfeits

– Restrict licensor’s future

Disadvantages – Reduce global consistency
Licensing is very popular in
toy business as it helps
– Lend strategic property
penetrate foreign markets
and prevents counterfeiting
of easily replicable toys of Chapter 13 - 10
action figures
 Franchising
Company (franchiser) supplies another (franchisee)
with intangible property over an extended period

+ Low cost and low risk

Advantages + Rapid expansion
+ Local knowledge

– Cumbersome to manage
Disadvantages too many in several nations
– Franchisees lose flexibility

Chapter 13 - 11
 Management Contract

Company supplies another with

managerial expertise for a
specific period of time
Advantages
+ Few assets risked
British Airport Authority, one of the + Nations finance projects
world’s leading airport + Develops local workforce
management companies, exports
its services by getting contracts to Disadvantages
manage airports worldwide
– Create competitor
(including Indianapolis, Naples,
– Personnel at risk
Melbourne)
Chapter 13 - 12
 Turn-key Project
Company designs, constructs, and tests
a production facility for a client
+ Firms specialize in core
competency
Advantages
+ Nations obtain infrastructure
projects

– Politicized process
Disadvantages
– Create competitor

The cost of turn-key reconstruction projects in Iraq was

estimated to be + $100 Billion, a form of export for
American and European companies
Chapter 13 - 13
Investment Modes (FDI)

Wholly Owned Subsidiary

(Greenfield or existing firm)

Joint Venture

Strategic Alliance

Chapter 13 - 14
 Wholly Owned Subsidiary
Facility entirely owned and controlled
by a single parent company
Advantages
+ Day-to-day and ultimate control
+ Coordinate subsidiaries
+ Economies of scale
+ Standardization (products, process,…)
Disadvantages
– Expensive (resource- commitment)
– Ultimate responsibility
– High risk
Chapter 13 - 15
 Joint Venture
Separate company created and jointly owned by two or more
independent entities to achieve a common business objective
Forward • Backward • Buyback • Multistage

Advantages Disadvantages
• Reduce risk level
• Penetrate markets • Partner conflict
• Access channels • Lose control
• Protect interests

Chapter 13 - 16
 Strategic Alliance

Entities cooperate (but do not form a separate

company) to achieve strategic goals of each

Advantages Disadvantages
Share project cost Create competitor
Tap competitors’ strengths Partner conflict
Gain channel access
Protect interests
Only the Star is still fully-made in Germany by Mercedes-Benz, most other
parts of the car are produced overseas, many (most?) of them by alliance
partners.
Rather than manufacture on their own, most car manufacturers form
alliances with companies that specialize on making tires, windshields,
International Business Management Chapter 13 - 17
electric motors, cables, and other components. This allows for focused use
 Forms of Foreign-Market Entry

Pro’s and con’s of each methods depend on:

- Level of desired control and acceptable risk
- Resource availability
- Type of product (tangible, property rights)
Chapter 13 - 18
 What is the BEST method?
As everything else, it depends on

Cultural environment
Resource availability
Market size
Production and shipping costs
International experience
Copyright and product sensitivity
Expected duration of the project
Chapter 13 - 19
 What is the BEST method?
As everything else, it depends on

Chapter 13 - 20
 Chapter Preview

• Discuss the essential aspects of exporting

• Define each form of countertrade
• Describe the advantages and disadvantages of each
contractual entry mode
• Identify the pluses and minuses of each investment
entry mode
• Identify strategic factors in selecting entry modes

Chapter 13 - 21
Selecting and Managing
Entry Modes