Svend Hollensen

GLOBAL MARKETING
4th Edition

Lecture by Ewa Baranowska-Prokop, Ph.D.

Some approaches to the choice of entry mode

Mac Baren Tobacco Company: Internationalizing the water pipe business

Is it a wise decision for MBTC to enter the water pipe market?
Which screening criteria would you suggest for MBTCs IMS (International Market Selection) process?

Which specific markets would you suggest MBTC enter?

Requires web access

Hollensen, Global Marketing 4e, Pearson Education 2008

8-2

Learning objectives
Identify and classify different market entry modes Explore different approaches to the choice of entry mode Explain how opportunistic behaviour affects the manufacturer/intermediary relationship Identify the factors to consider when choosing a market entry strategy

Hollensen, Global Marketing 4e, Pearson Education 2008

9-3

What is this?
An institutional arrangement necessary for the entry of a companys products into a new foreign market is known as an ______.

Entry mode

Hollensen, Global Marketing 4e, Pearson Education 2008

9-4

Types of entry modes

Export
Intermediate Hierarchical

Hollensen, Global Marketing 4e, Pearson Education 2008

9-5

Rules for choosing mode of entry

Naive rule

Pragmatic rule

Strategy rules

Hollensen, Global Marketing 4e, Pearson Education 2008

9-6

Choosing the right entry mode

Managers must decide on the correct entry mode for a particular product/ country, this is done by following on of three rules:
1. The Naive rule - whereby managers use the same entry mode for exporting to all their target countries, by far the riskiest option since managers can end up using an inappropriate entry mode for a particular foreign country or forsake promising foreign markets 2. The Pragmatic rule - whereby managers start by assessing export entry and change their entry strategy accordingly, this saves time and effort yet ultimately fails to bring managers to the appropriate mode 3. The Strategy rule - whereby managers use right entry mode as a key to the success of their foreign entry strategy, making systematic comparisons of all entry modes. It is the most complicated method yet results in better entry decisions.
Hollensen, Global Marketing 4e, Pearson Education 2008 9-7

What is this?
Which rule for choosing a mode of entry is based upon selecting the mode that maximizes the profit contribution over the strategic planning period subject to (a) the availability of company resources, (b) risk and (c) non-profit objectives?

Strategy rule

Hollensen, Global Marketing 4e, Pearson Education 2008

9-8

Transaction cost approach

Opportunistic behaviour of export intermediary

VS

Opportunistic behaviour of producer

Hollensen, Global Marketing 4e, Pearson Education 2008

9-9

Export intermediary responses to opportunistic behaviour of producer

Establish personal relations with producers key employees Create an independent identity in connection with selling producers products Add further value to the product

Hollensen, Global Marketing 4e, Pearson Education 2008

9-10

All factors affecting decision

Hollensen, Global Marketing 4e, Pearson Education 2008

9-11

Internal factors affecting market entry mode decision

Product

Product complexity International experience

+

Product differentiation advantage

+ +

Entry mode decision

+

Firm size

Hollensen, Global Marketing 4e, Pearson Education 2008

9-12

Desired mode characteristics affecting market entry mode decision

Risk averse
-

Control

Entry mode decision

Flexibility

Hollensen, Global Marketing 4e, Pearson Education 2008

9-13

Transaction-specific factors affecting market entry mode decision

Tacit nature of know-how
+

Entry mode decision Opportunistic behaviour

+ +

Transaction costs

Hollensen, Global Marketing 4e, Pearson Education 2008

9-14

External factors affecting market entry mode decision

-

Sociocultural distance

Entry mode decision

+

Country risk/ demand uncertainty Market size/ growth

Number of export intermediaries

Direct/ indirect trade barriers

Intensity of competition

Hollensen, Global Marketing 4e, Pearson Education 2008

9-15

For discussion
Do you agree with the view that LSEs use a rational analytic approach to the entry mode decision, while SMEs use a more pragmatic/opportunistic approach? Identify the most important factors affecting the choice of foreign entry mode. Prioritize the factors.

Hollensen, Global Marketing 4e, Pearson Education 2008

9-16

Major Types of Exporting

Indirect export

Direct export
Cooperative export

Hollensen, Global Marketing 4e, Pearson Education 2008

10-17

What is this?
The measurement of the strength of a relationship between manufacturer and export-partner in terms of trust, commitment, and cooperation is known as ______.

Partner mindshare

Hollensen, Global Marketing 4e, Pearson Education 2008

10-18

Drivers of mindshare

Commitment and trust

Collaboration

Mutuality of interest

Hollensen, Global Marketing 4e, Pearson Education 2008

10-19

Export modes

Hollensen, Global Marketing 4e, Pearson Education 2008

10-20

What is this?
Which mode of export refers to a manufacturers use of independent export organizations located in its own country (or a third country)?

Indirect export modes

Hollensen, Global Marketing 4e, Pearson Education 2008

10-21

Indirect export modes

Sale is like a domestic sale Most appropriate for firms with limited international expansion objectives Appropriate for firms using international sales as a means of disposing of surplus production

Hollensen, Global Marketing 4e, Pearson Education 2008

10-22

Indirect entry modes

Export buying agent
Broker Export management company Trading company Piggyback

Hollensen, Global Marketing 4e, Pearson Education 2008

10-23

What is this?
What term refers to a representative of foreign buyers who is located in the exporters home country and provides services such as identifying potential sellers and negotiating prices?

Export buying agent

Hollensen, Global Marketing 4e, Pearson Education 2008

10-24

What is this?
What term refers to an agent, based in the home country, who is a specialist in performing contractual functions but does not actually handle the products sold or bought?

Broker

Hollensen, Global Marketing 4e, Pearson Education 2008

10-25

Export management company/export house

Specialist companies that act as the export department EMCs spread selling, administrative, and transport costs because of economies involved making large shipments of goods from a number of companies EMCs offer far wider exposure for client products at a lower cost
Hollensen, Global Marketing 4e, Pearson Education 2008 10-26

Disadvantages of using EMCs

EMC specialization may not correspond to supplier objectives EMCs are paid commission and may focus on opportunities that enhance returns quickly EMCs may represent too many clients to provide outstanding service to any single one EMCs may carry competing products

Hollensen, Global Marketing 4e, Pearson Education 2008

10-27

What is this?
What term refers to an indirect mode of export which entails an inexperienced SME riding on the capabilities of a larger company already experienced in foreign markets?

Piggyback

Hollensen, Global Marketing 4e, Pearson Education 2008

10-28

Piggyback considerations for the carrier

Advantages Disadvantages Enables use of Quality control excess export capacity concerns May fill gap in product Continuity of supply line issues Broadens product range without development and manufacturing costs

Hollensen, Global Marketing 4e, Pearson Education 2008

10-29

Piggyback considerations for the rider

Advantages No need for distribution system Opportunity to learn from carrier Disadvantages Loss of control over marketing of products Potential lack of commitment from carrier Carrier may wish to acquire rider

Hollensen, Global Marketing 4e, Pearson Education 2008

10-30

Direct entry modes

Export via distributors

Export via agents

Hollensen, Global Marketing 4e, Pearson Education 2008

10-31

What is this?
An independent company that stocks the manufacturers product, but has substantial freedom to choose its own customers and price is known as a(n)______.

Distributor

Hollensen, Global Marketing 4e, Pearson Education 2008

10-32

What is this?
An independent company that sells on to customers on behalf of the manufacturer, does not stock the product, and earns profits from commission paid by the manufacturers is known as a(n)______.

Agent

Hollensen, Global Marketing 4e, Pearson Education 2008

10-33

Finding an intermediary
Ask potential customers to suggest a suitable agent Obtain recommendations from institutions such as trade associations, chambers of commerce, and government trade departments Use commercial agencies Poach a competitors agent Advertise in suitable trade papers

Hollensen, Global Marketing 4e, Pearson Education 2008

10-34

Matchmaking between manufacturer and two potential partners

Hollensen, Global Marketing 4e, Pearson Education 2008

10-35

What to look for in an intermediary

Size of firm Physical facilities Willingness to carry inventories Knowledge/use of promotion Reputation with supplier, customers, and banks Sales performance record Cost of operations Overall experience Knowledge of English or other relevant languages Knowledge of business methods in manufacturers country

Hollensen, Global Marketing 4e, Pearson Education 2008

10-36

Contracts with intermediaries

General provisions

Rights and obligations of manufacturer

Rights and obligations of distributor

Hollensen, Global Marketing 4e, Pearson Education 2008

10-37

Principles of the law of agency

An agent cannot take delivery of the principals goods at an agreed price and resell them for a higher amount without the principals knowledge and permission Agents must maintain strict confidentiality regarding their principals affairs and must pass on all relevant information Principal is liable for damages to third parties for wrongs committed by an agent
Hollensen, Global Marketing 4e, Pearson Education 2008 10-38

Agent entitlements upon contract termination

Full payment for any deal resulting from its work A lump sum of up to one years past average commission Compensation for damages to agents commercial reputation caused by unwarranted termination

Hollensen, Global Marketing 4e, Pearson Education 2008

10-39

Functions of export marketing groups

Exporting in the name of the association Consolidating freight, negotiating rates, and chartering ships Performing market research Appointing selling agents abroad Obtaining credit information and collecting debts Setting prices for export Allowing uniform contracts and terms of sale Allowing cooperative bids and sales negotiation

Hollensen, Global Marketing 4e, Pearson Education 2008

10-40

Lysholms Linie Aquavit is exported to Sweden, Norway, Denmark, Germany, and the US

Source: http://linie-aquavit.com

Hollensen, Global Marketing 4e, Pearson Education 2008

10-41

Lysholm Linie Aquavit: A case study

What are the advantages for Arcus of having distributors as part-owners? What should be Arcus main criteria for selecting new distributors or cooperation partners, for Linie Aquavit in new market? Would it be possible to pursue an international branding strategy for Linie Aquavit?
Requires web access

Hollensen, Global Marketing 4e, Pearson Education 2008

10-42

For discussion (1)

Why is exporting frequently considered the simplest way of entering foreign markets and is thus favoured by SMEs? Why is it difficult financially and legally to terminate a relationship with overseas intermediaries? What should be done to prevent or minimize such difficulties?

Hollensen, Global Marketing 4e, Pearson Education 2008

10-43

For discussion (2)

How can the carrier and the rider both benefit from a piggyback arrangement? When a firm begins direct exporting, what tasks must it perform? The international marketer and the intermediary will have different expectations concerning the relationship. Why should these expectations be spelled out and clarfied in the contract?

Hollensen, Global Marketing 4e, Pearson Education 2008

10-44