Prof. Dr.

Thomas Wrona TUHH isim Internationalization Strategies SS 2014

CONTENTS
1. Foundations of International Management
1.1 Internationalization and International Management
1.2 What is an international firm?
1.3 Objectives of international firms

2. Strategies of international firms
2.1 Introduction
2.2 Target market strategies
2.3 Market entry strategies and foreign operation modes
2.4 Timing strategies
2.5 Allocation strategies
2.6 Non-market strategies

3. Internationalization processes
4. Managing HQ-Subsidiary relationships
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
MARKET ENTRY STRATEGIES AND FOREIGN OPERATION
MODES
Several possibilities to describe entries
Frequently used criterion: resource intensity
- intensity of international resource transfer

Here: different, ideal-typical market entry strategies
92
Market entry: initial entry of a market
Foreign operation modes: current operations in markets
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
International
Alliances
Capital and
management
degree at
home
country
Capital and management
degree at host country
Source: adapted from Kutschker/Schmid (2004): p. 823
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
EXPORTING



2 types are possible:
! indirect export:
Foreign trade activities take place with partnership with local distributors
! direct export:
Foreign trade activities take place without partnership with local distributors;
There is a direct relationship between local and foreign business partners
Exporting is typically one of the first steps of internationalization
Sale of goods or services abroad
EXPORTING
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INDIRECT VS. DIRECT EXPORT
Source: adapted from Welge/Holtbrgge (2006): Internationales Management, Schffer-Poeschel Verlag, Stuttgart, 2006, p. 110
95
Domestic
market
Foreign
market
Border
Indirect
export
Direct
export
Producer
Producer
Domestic
exporter
Foreign
customer
Foreign
importer
(foreign branch)
Foreign
customer
Foreign
customer
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
EXPORT - EVALUATION
Advantages
low resource commitment
low risk, especially using indirect
export with local distributors who sell
the goods at their own risk
low organizational complexity
experience of the distributor with the
local market/customer proximity
a possibility to get to know foreign
markets gradually
inexpensive form of
internationalization
high strategic flexibility
risk of trade barriers
problems with currency exchange
rates using direct export
Low acceptance in the host country,
because of no local presence of the
firm
indirect export is profit-reducing in
the long term
sales potential is not optimally used
no foreign experience and direct
customer relations / lack of loyalty
Disadvantages
96
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
97
Source: adapted from Kutschker/Schmid (2004): p. 823
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
Capital and
management
degree at
home
country
Capital and management
degree at host country
International
Alliances
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
LICENSING

Intellectual property rights licenses
Patents
Design (aesthetic pattern, e.g. fabric or models)
Trademark (Brand)
Copyrights (e.g. Word, Music, Art etc.)
Know-how licenses
Technical know-how
Commercial know-how
Granting of permission to use intellectual property rights or not
protected practical knowledge under defined conditions.
LICENSING AGREEMENT
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
EXAMPLES OF LICENSES OF SANOFI-AVENTIS AND GENTA
R&D license Production license Sales license
Aventis received a co-
exclusive right to use the
technology associated with
Genta for own research
purposes, to reproduce and
modify it
Aventis received the
worldwide exclusive right of
Genasense production

(Genasense is an innovative
substance for supporting tumor
therapies, currently not approved
by FDA)
Exclusive distribution right,
trademark rights & copyright
(outside of the USA) for
Aventis
Genta retains only the
approval right in case
foreign operations are
carried out by third parties
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INTL LICENSING EVALUATION
Advantages
lower resource commitment
stable (regular) returns at low capital
risk
use of market know-how of the
licensee
entry strategy in case of trade
barriers
faster market entry, while there is
access to the resources of the
partner
no (very low) transport costs
lack of control
choosing a suboptimal partner !
quality and image problems
lower influence on the business
policy of the licensee
disclosure of sensitive know-hows
Disadvantages
100
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
101
Source: adapted from Kutschker/Schmid (2004): p. 823
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
Capital and
management
degree at
home
country
Capital and management
degree at host country
International
Alliances
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
Source: adapted from Holtbrgge/Welge (2010): p. 106
FRANCHISING
= a franchisor from the home country grants a so called business
format to a franchisee in a foreign country
FRANCHISING
102
Fig. 4-5
Franchising
Franchise agreement
" Business concept
(name, brand, equipment)
" Services
" Education and training
Franchisor Franchisee
Franchising fees
business format
= a time-proven procurement, sales and management concept
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
FRANCHISING
A franchisor grants a franchisee the right and obligation to sell specific
goods or services for their own account using the trade name, trade mark,
equipment and following the marketing concept of the franchisor
Franchisor has an obligation
- to train the franchisee
- to continuously inform him
- to support him at setting up his business
- to provide consulting
- to prepare advertising activities
- and he has the right to control the business activities
Franchisee has an obligation
- to make investments
- to follow the rules and instructions
- to secure the image
- to pay franchising fees (franchising fees depend on the industry and there is an
initial fee and/or continuing fees)
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INTL FRANCHISING EXAMPLE
104
McDonalds
On a worldwide scale, about 70% of McDonalds restaurants are franchised. In Europe, getting a franchise
is a two-year process of screening and selection. Franchisee candidates must work at a store for two
years and undergo mandatory training. Those individuals selected pay US$ 45,000 for a 20-year contract.
Typically, start-up costs range from US$ 455,000 to US$ 768,500. An individual is expected to contribute
between US$ 100,000 and US$ 175,000 of his or her own money to start the restaurant.

In return, McDonalds gets a base royalty of 5% of sales, another approximately 8.5% of sales for rent of
the company-owned store, and an additional 3.75% of sales for the franchisees contribution to advertising.
All these percentages come from gross sales and not profit. However, despite McDonalds seemingly heavy
take, the average European store has a profit of US$ 200,000 per year. Large, high-volume stores in major
cities can even triple that sum.
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
105
Source: adapted from Kutschker/Schmid (2004): p. 823
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
Capital and
management
degree at
home
country
Capital and management
degree at host country
International
Alliances
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INTL ALLIANCES
Formalized and long-term cooperation between at least two legally
independent firms from different countries for joint implementation of
tasks whereby the goals can be better achieved jointly
INTERNATIONAL ALLIANCES
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
Joint Venture
long-term business
agreement between two
or more parties in the
form of a new firm
based on equity
contribution and joint
management
Strategic Alliances
Strategic partnership of
at least two, often
however more firms in
strategic important
area like R&D or
production
Consortiums
project-oriented
cooperation between
firms
107
KINDS OF INTL ALLIANCES
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INTL JOINT VENTURE EXAMPLE
108
General Mills & Nestl
When the CEO of General Mills decided to enter the European market, where a very tough rival, Kellogg, was
entrenched, he knew it would be very expensive to set up manufacturing facilities and a huge marketing force.
However, he knew that another food giant, Nestl, the worlds largest food company, has a famous name in
Europe, a number of manufacturing plants, and a strong distribution system. On the other hand, Nestl lacked
strong cereal brand names, something that General Mills, the no. 2 American cereal company, had. Just two
weeks after the initial discussions, General Mills and Nestl formed a joint venture: Cereal Partners Worldwide.

General Mills provided the cereal technology, brand names, and cereal marketing expertise. Nestl supplied its
name, distribution channels, and production capacity. Cereal Partners Worldwide distributes cereals everywhere
in the world except the U.S. Within two years, the new company had already passed Quaker Oats, the long-
time number two in Europe after Kellogg. According to General Millss vice chairman, building factories and
distribution channels from scratch would have taken years.
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
INTL JOINT VENTURES EVALUATION
109
Advantages Disadvantages
sharing of risk
JV with a local partner allow to
circumvent local content rules or
import restrictions or local knowledge
deficits
accelerated market entry (vs. Subs.)
reduced capital need
Learning advantages (from local
partner)
Easier management compared to other
forms of alliances due to separate
legal form
high coordination costs compared to
an autonomous market entry
undesirable knowledge diffusion
problems to follow a cross-country
strategy when there are JV with
different partners
JV tend to instability (partners
cancelled agreement/divest company)
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
110
Source: adapted from Kutschker/Schmid (2004): p. 823
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
Capital and
management
degree at
home
country
Capital and management
degree at host country
International
Alliances
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
SALES AND PRODUCTION SUBSIDIARIES
Synonymous to:
- Production sites (mostly production entity factories or
plants)
- Branch offices (mostly sales)
- Representative offices (initiation of contacts)
= legally dependent foreign subsidiaries
111
SALES AND PRODUCTION SUBSIDIARIES
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
SALES AND PRODUCTION SUBSIDIARIES EXAMPLE
112
The banking sector and the manufacturing industry
A bank that wants to initiate business with clients in other countries but does not want to open a
banking operation in that country can do so through foreign representative offices. A foreign
representative office of a bank is basically a legally dependent sales office that provides information
regarding the financial services of the bank, but cannot deliver the services itself. It cannot accept
deposits or make loans. The foreign representative office of a U.S. bank will typically sell the banks
services to local firms that may need banking services for trade or other transactions in the U.S.

In the manufacturing industry, many firms establish foreign plants or foreign affiliates. Similar to a foreign
representative office, foreign plants and foreign affiliates are legally dependent corporate units of an
international firm. But in contrast to a foreign representative office that is established to initiate business
contacts, foreign plants usually are production-oriented, and foreign affiliates are sales-oriented. For
instance, many car manufacturers have their cars produced at legally dependent foreign production
plants, and many firms in the fashion industry sell their apparel abroad at the stores of legally dependent
foreign affiliates.
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014 113
Advantages
Visible presence in the host country
enforcement of strategies without need
of coordination with third parties
uniformity of market appearance
Rep offices can provide additional
support for exporting firms
Production branches enhance flexibility
across countries

higher risks especially in politically
unstable countries due to high resource
transfer and lower reversibility of
investments
only few activities are internationalized
(e.g. sales) low possibilities to take
advantage of country differences
Disadvantages
SALES AND PRODUCTION SUBSIDIARIES - EVALUATION
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ENTRY MODES DEPENDING ON RESOURCE INTENSITY
114
Source: adapted from Kutschker/Schmid (2004): p. 823
100%
100%
Exporting
Licensing
Franchising
Wholly Owned
Subsidiary
Production
Subsidiary
Sales
Subsidiary
Capital and
management
degree at
home
country
Capital and management
degree at host country
International
Alliances
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
WHOLLY OWNED SUBSIDIARIES
= legally independent foreign subsidiaries
WHOLLY OWNED SUBSIDIARIES
115
Greenfield Investments

Establishment of a new foreign
subsidiary. Resources needed for the
new business area are developed
internally

Mergers & Acquisitions

Acquisition: A firm from the home
country buys all or most of the
ownership stakes of a foreign firm.

Merger: Combining of two legally and
economically independent firms, one
domestic and one foreign, whereat at
least one firm loses its legal
autonomy.
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
GREENFIELD INVESTMENTS EXAMPLE OF LIDL
116
Lidl
With annual sales revenues of almost " 40 bn. per year, Germany-based Lidl is one of the leading food
discounters in the world. Lidl operates in 22 countries and has almost 8,000 stores worldwide. When entering
new foreign markets, Lidl usually establishes wholly-owned foreign subsidiaries in the form of greenfield
investments. Afterwards, Lidl builds logistics centres within the country for distributing the products to the
discount stores. As a next step, Lidl buys or rents property for building its stores usually 40 to 80 stores
within the first three years.

In Finland, for instance, Lidl established a wholly-owned foreign subsidiary in 2002, built several logistics
centres and opened ten discount stores in the country. Shortly after, Finland was the basis for further
expansion to the Scandinavian countries: Lidl opened its first stores in Sweden in 2003, it entered the
Norwegian market in 2004, and it broke into the Danish market in 2005.

In 2007, Lidls sales revenues in Denmark, Norway, Sweden, and Finland amounted to more than " 1 bn.
However, Lidl had to withdraw from the Norwegian market in 2008 due to bad economic performance.
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
GREENFIELD INVESTMENTS - EVALUATION
Advantages
lower risk of failure since internal
growth is usually affected with lower
problems
building on current strategies (no
historic heritage of acquired firm)
better fit to culture
application of the newest
technologies
time-consuming
problems of acquiring relevant local
resources (i.a. market know-how)
increased rivalry in the market (new
player)
Disadvantages
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Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
ADVANTAGES & DISADVANTAGES OF ENTRY MODES
118
Entry Mode Advantages Disadvantages
Exporting
Low commitment, low risk, low complexity
Strategy for gradually entering markets
Ability to realize location and experience curve
economies
High transport costs
Trade barriers
Low acceptance of goods abroad
No foreign experience/customer contact
Licensing
Low development costs and risks
Use of market know-how of the licensee
Faster market entry, while there is access to the
resources of the partner
Lack of control over technology
Inability to realize location and experience curve
economies
Lower influence on the business policy of the
licensee
Franchising
Low development costs and risks
Rapid internationalization is possible
Uniform public appearance worldwide
Lack of control over quality
Uniform practice worldwide requires a
standardized product
Development of complex management and
control mechanisms
Joint Ventures
Access to local partners knowledge
Sharing development costs and risks
JV with a local partner allow to circumvent local
content rules/import restrictions
Undesirable knowledge diffusion
No independent action
JV tend to instability (partners cancelled
agreement/divest company)
Wholly owned
Subsidiaries
Building on existing business relations/image (M&A)
Acquisition and protection of knowledge
Ability to engage in global strategic coordination
Ability to realize location and experience economies
Highest costs and risks
May increase rivalry in the market (greenfield)
Management problems selection & integration
of firms is a complex task (M&A)
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014 119
Foreign Trade
Cross-national trade with goods or services in the form of export or import
International Transfer of Resources
International Licensing:
Transfer of intangible assets
(e.g. know-how) to a foreign firm
for a licence fee
International Franchising:
Transfer of a business format/
business package to a foreign firm
for a franchise fee
Internat. Management
Contracting:
Transfer of management
services to a foreign firm
for a management fee
International Cooperation
International Consortium:
Project-oriented cooperation
between firms from
different countries
International Strategic Alliance:
Strategy-oriented cooperation
between firms from
different countries
International Joint Venture:
Cooperation between firms from
different countries in the form of
creating an additional joint firm
Foreign Direct Investment
Foreign Branch:
Legally dependent foreign
corporate unit (plant, affi-
liate, representative office)
Foreign Minority Stake:
Stake of < 50% in a
legally independent foreign
corporate unit
Foreign Subsidiary:
Stake of 50% in a
legally independent foreign
corporate unit
International Merger:
Amalgamation of firms
from different countries
into a new firm
WRAP-UP: INTL ENTRY STRATEGIES & OPERATION MODES
Prof. Dr. Thomas Wrona TUHH isim Internationalization Strategies SS 2014
FACTORS INFLUENCING MARKET ENTRY STRATEGIES
What does the choice of a market entry strategy depend on? What
would you consider entering an international market?
Knowledge & experience of decision maker
Country risks (political, market) & potential
Objectives (e.g. efficiency seeking vs. market seeking)
Strategic considerations
(e.g. kind of competitive advantage, speed, flexibility, economies of scale,
use of synergies, control possibilities)
Product characteristics (e.g. transferability, relevance of reputation,
complexity)
Legal restrictions (e.g. local content)
(...)
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