Professional Documents
Culture Documents
1.1 If an organization has decided to enter an overseas market, the way it does
so is of crucial strategic importance. The mode of entry affects a firm’s entire
marketing mix of its control over the mix elements.
1.3 Each of these modes (or levels of involvement) is discussed in more detail
below.
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b. according to the market (eg some countries limit imports to protect
domestic manufacturers whereas others promote free trade);
c. over time (eg some countries become more – or less – hostile to direct
inward investment by foreign companies).
2.2 To choose a mode of entry to a particular market, a firm should consider the
following issues.
b. Company size. A small firm is less likely than a large one to possess
sufficient resources to set up and run a production facility overseas. Not
only would the firm have to provide investment capital and organizational
ability but it would also have to support the costs of continuing operations.
d. Mode quality. In some cases, all modes may be possible in theory, but
some are of questionable quality or practicality. The lack of suitably
qualified distributors or agents would prelude the export, direct or indirect,
of high technology goods needing installation, maintenance and servicing
by personnel with specialist technical skills.
h. Risks. Some risks, such as political risk or the risk of the expropriation of
overseas assets by foreign governments, might discourage firms from
using overseas production as the mode of entry to overseas markets.
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Instead, firms might prefer the indirect export mode as it is safer. On the
other hand, the risk of losing touch with customers and their requirements
would encourage either direct export or overseas production.
i. Control needs. Control over the marketing mix and the distribution
channel varies greatly by mode of entry. Production overseas by a wholly
owned subsidiary gives a firm absolute control while indirect export offers
virtually no control to the exporter.
3. EXPORTING: INTRODUCTION
General
3.1 Exporting is the easiest, cheapest and most commonly used route into a new
foreign market. Many firms become exporters in an unplanned, haphazard and
reactive way, simply by accepting orders from potential customers who happen
to be based overseas. However, it is also common for a firm to take a proactive
approach to exporting, by systematic planning and the identification and selection
of target markets for its exports. This gives rise to several advantages over
those entry modes which require greater involvement in the overseas market.
3.2 Although exporting requires a low involvement in the overseas market, this does
not necessarily imply that only low investment is needed. Exporting requires
investment in market research, strategy formulation and careful implementation
of the marketing mix. The initial success of Japanese car firms in the USA and
Europe was based on research and strategic planning that was both extensive
and costly.
4. INDIRECT EXPORTS
4.1 Indirect exporting is where a firm’s goods are sold abroad by other
organizations. In this case a firm is not really engaging in true international
marketing. There are four ways of indirect export.
a. Export houses.
b. Specialist export managers.
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c. UK buying offices of foreign stores and governments.
d. Complementary exporting.
Export houses
4.2 Export houses are firms which facilitate exporting on behalf of the
producer. There are three main types of export house.
a. Usually the producer has little control over the market and the
marketing effort.
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d. As with all intermediaries, an export house or merchant might
service a variety of producing organizations. An individual producer
cannot rely on the merchant’s exclusive loyalty. The merchant’s efforts
are divided between the marketing requirements of products from a
number of different suppliers.
e. Export houses are not normally willing to enter into long term
arrangements with a producer.
4.6 Many foreign governments and foreign companies (eg department stores)
have buying offices set up permanently in the UK. In addition, other foreign
companies send representatives on buying expeditions on the UK. The BOTB
has details of these visits.
Complementary exporting
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b. An agent, selling the rider’s goods for commission;
5. DIRECT EXPORTS
5.1 Direct exporting occurs where the producing organization itself performs
the export tasks rather than using an intermediary. Sales are made indirectly to
customers overseas who may be the wholesalers, retailers or final users.
Overseas agencies
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c. The exporter does not have to make a large investment outlay.
5.5 Disadvantages
c. Many agents are too small to exploit a major market to its full
extent. Many serve only limited geographical segments.
Distributors/stockists
5.6 Distributors are customers with preferential rights to buy and sell a range
of a firm’s goods in a specific geographical area.
Distributors earn profit, not commission. They differ from wholesalers only in that
their selling and marketing activities on behalf of a producer are restricted
geographically.
5.7 Stockists are distributors who receive more favourable financial rewards
than distributors as they normally undertake to carry at least a certain minimum
level of stock.
5.9 A firm can establish its own office in a foreign market for the purpose of
marketing and distribution.
5.10 Advantages
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b. Sales performance will improve, as the commitment and
motivation of a producer’s own staff should be more effective than those
of an agent.
5.11 Disadvantages
6.1 Firms that are fully committed to international marketing are often drawn into
overseas manufacture. This give rise to several major benefits.
a. Some markets (eg the USA) are so large that economies of scale cab still be
gained from overseas production.
d. Overseas production can overcome the effects of tariff and non-tariff barriers
to imports.
6.2 For firms which are late entrants to a market, taking over a firm in the overseas
market can be a more effective way of establishing a production facility overseas
than building one from scratch. Alternatively the firm might enter into cooperative
agreements with firms in the overseas market.
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7.1 A firm’s strategic choice of overseas production method depends on its
objectives, resources and level of commitment to IM.
Licensing
7.3 Licensing is growing in extent and importance throughout the world. It is used by
small, medium and large firms, as it has many advantages. These are listed
below.
b. It enables entry into markets that would otherwise be closed (eg by tariffs,
government attitude and policies).
7.4 Licensing also suffers from drawbacks, however, among these are:
a. Revenues from licenses are very low, usually less than 10% of turnover.
The significance of this naturally depends on the profit margins that might
otherwise be expected.
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c. Although the contract may specify a minimum sales volume, there is
some danger that the licensee will not fully exploit the market.
d. Product quality might deteriorate if the licensee has a more lax attitude to
quality control than the licensor.
Franchising
7.7 The advantages and disadvantages of franchising are largely the same as those
of licensing.
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Contract manufacture
7.8 In the case of contract manufacture a firm (the contractor) makes a contract with
another firm (the contractee) abroad whereby the contractee manufactures or
assembles a product on behalf of the contractor. The contractor retains full
control over marketing and distribution whilst the manufacture is done by a local
firm. Firms such as Del Monte, Colgate, and Procter and Gamble, use this
method of entry to overseas markets.
7.10 Contract manufacture does involvement some disadvantages, which include the
following
Joint Ventures
7.11 A joint venture is an arrangement where two firms (or more) join forces for
manufacturing, financial and marketing purposes and each has a share in both
the equity and the management of the business.
7.12 Licensing, franchising and contract manufacture are loose forms of join venture.
However joint ventures are bound by much stronger formal ties.
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7.13 A joint venture is usually an alternative to seeking to buy or build a wholly owned
manufacturing operation abroad and can offer substantial advantages.
f. Joint ventures can provide close control over marketing and other
operations.
7.14 The major disadvantage of joint ventures is that there can be major conflicts of
interest between the different parties. Disagreements may arise over.
profit shares;
amounts invested;
the management of the joint venture; and
the marketing strategy
For these reasons firms such as IBM have, in the past, been reluctant to engage in joint
ventures, although this policy has changed with the announcement of cooperative
agreements with Apple (for work stations) and Siemens.
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7.15 There is always a potential for conflict. A company should minimize it by:
7.17 Acquisition, as a mode of entry, is rapid and offers the benefits of an existing
management team, market knowledge and all the other trappings of a ‘going
concern’. General Motors, for example, enjoyed these gains on entry to the UK
market by the acquisition of Vauxhall Motors. At the same time, acquisitions
which go wrong (in the financial sector the Midland Bank’s purchase of the
California based Crocker Bank) can have serious and long term penalties.
7.18 Entry to an overseas market by creating new capacity can be beneficial if there
are no likely candidates for takeover, or if acquisition is prohibited by the
government.
b) The investing company may also be able to start afresh with new
forms of managing industrial relations.
7.19 These were major benefits for Nissan Motors when the company created new
capacity in Sunderland and Tennessee. However, another reason for direct
inward investment by Japanese companies in Europe is the threat of being
excluded from the single European market. The UK has been a prime site
because of government support and relatively low labour costs.
a) The firm does not have to share its profits with partners of any
kind.
b) The firm does not have to share or delegate decision making and
so there are no losses in efficiency arising from inter-firm conflict.
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e) The firm gains a more complex ‘feel’ for IM and more varied
experience from overseas production than from other arrangements.
8. CONCLUSION
a. Indirect exports;
b. Direct exports;
c. Overseas manufacture.
8.3 Indirect exporting occurs when a firm uses an intermediary. Direct exporting is when
the firm exports directly to the overseas markets or overseas agency.
8.4 Some firms set up overseas branch offices to facilitate direct exports, but others
enter the overseas market for good, as it were, by setting up production facilities
overseas.
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