Chapter 5:

Entry Strategies for Emerging Markets

Entry Strategies for Emerging Markets

Need thoughtful strategy to tackle dissimilarities at different levels (global, macro, micro) Entry strategies depend on numerous factors including:
Size of the market, business environment Product-market fit Competitive levels

Export Entry Modes

Indirect Exporting Gives responsibility to domestic intermediaries
Market penetration costs handed off

Minimizes risk, low start-up costs Lack of control

Intermediary sets final price/ their image is your image

Firms use EMCs or ETCs to order to utilize their established foreign market network In process, firms could lose control

Export Entry Modes

Direct Exporting Exporting through overseas intermediaries Higher start-up costs, riskier than indirect method Basic criterion is control
Determined by technical sophistication of the product, need for after-sales service

Contractual Entry Modes

Licensing Domestic firm (licenser) makes intangible assets available to foreign company (licensee) in exchange for royalties/payments
Quick and easy method of penetrating a foreign market Guaranteed royalties, little capital investment Low commitment entry mode

Contractual Entry Modes

Licensing (cont.) Disadvantages
Limited revenue compared with exporting or investing in market Agreement locks in specific entry mode that cannot be altered until contract expires Lack of control over marketing/production processes

Contractual Entry Modes

Franchising Grants business systems and property rights
Franchisee operates under franchisers name Follows franchisers policies and procedures Franchiser receives compensation from the franchisee

Allows for quick expansion into new markets

Must continuously provide support to franchisee

Still a lack of control over everyday operations

Contractual Entry Modes

Technology Transfer Nature of technology/service is at the core
Includes price, method of transfer, terms of exchange, buyer-seller relationship

Exclusive products/service can charge a premium price, common products/service cannot

Contractual Entry Modes

Countertrade Transaction of goods and services between two parties in addition to or in place of currency Growing resurgence due to lack of money/lack of appropriate exchange rates
Indebted countries have difficulty securing credits

Contractual Entry Modes

Counterpurchase Non-traditional countertrade agreement
- If the contractual exchange is not of equal value, the remaining payment is made in cash

Buyback Agreement Western firms provide technology and supplies to produce goods Host plant pays back firm in goods produced by plant until initial start-up costs are recovered

Contractual Entry Modes

Offset Developing country purchases goods that require certain parts to be constructed in purchasing country
Often found in defense sectors, expensive items

Clearing Achieving balanced accounts of withdrawals and deposits

Contractual Entry Modes

Management Contracts Legal right to manage everyday operations in a foreign market
Alternative to foreign investment

Doesnt allow Western firm to establish permanent market position

Consumes time and human capital

Contractual Entry Modes

Contract Manufacturing/Subcontracting Host company manufactures/produces product provided by Western firm
Finished product can then be exported or marketed locally

Similar to licensing
Requires small investment, allows for quick entry

Problems finding adequate host manufacturer

Contractual Entry Modes

Turnkey Projects Completed projects are turned over to foreign owner just before commencement
Contractor must train and prepare owner to operate facility

Developing countries usually prefer these projects to direct investment

Desire to be self-sufficient Distrust of Western corporations

Contractual Entry Modes

Infrastructural Projects Formalized buying process, integral government role Buying done by privately-owned or government operated organizations Sellers market Marketing Subsidiary Good mechanism for capitalizing on spin-off sales and after-sales service Excellent information source for market

Investment Entry Modes

Joint Ventures Equity shared between two companies
Majority, minority, or fifty-fifty venture Shares capital, limits risk Both parties must be patient and flexible with one another

Choosing local partner is very important

Provides local knowledge and skills necessary to run operations

Investment Entry Modes

Foreign Direct Investment (FDI) Transfer of entire enterprise to a foreign market Can be done through an acquisition or by building a new facility (i.e. Greenfield venture) Advantages:
Lower production costs Marketing power (expand product line based on local preferences)

Investment Entry Modes

Foreign Direct Investment (cont.) However, FDI requires more capital resources and hence more risk (i.e. political) Disadvantages
Difficulty finding adequate company to acquire Problems fitting acquired company into existing operations Blocked currency

Chapter 6:
Developing and Managing Relationships in Emerging Markets

Developing and Managing Relationships in Emerging Markets

Cultural differences greatly affect managements ability to conduct business Verbal and nonverbal communications must adapt to those of host culture
Nonjudgmental behaviors inspire trust

Types of Relationships in Emerging Markets

Managing Relationships With a Foreign Gov.
Host countries trade policy has huge ramifications for Western firms Important to find right mix between company resources and government needs
Use alter, avoid, accede or ally strategies to manage conflict

Types of Relationships in Emerging Markets

An alter strategy should be used when the firm has power and sees the issue has critical to their operations
An accede strategy is appropriate when the firm has little power to influence and sees the issue as irrelevant

Types of Relationships in Emerging Markets

An avoid strategy should be used when the firm is in a position of power but the issues are of low importance to the firm but of high importance to the host government
An ally strategy is most effective when the firm has limited power but sees the issue as important

Types of Relationships in Emerging Markets

Managing Relationship with Expatriates An expatriate is someone who lives and works in another country
Requires special attention to properly satisfy needs of individual and family members

Many struggle with cultural differences

Expatriate failure is major problem in international management, often due to spousal/family adjustment Training programs are needed to support transition

Types of Relationships in Emerging Markets

Managing Relationships With A Foreign Partner

Develop cross-functional (complementary) teams in order to:

Build and maintain relationships at all organizational levels Ensure that relationships are still intact if lead contact at foreign partner leaves

Types of Relationships in Emerging Markets

Managing Relationships With Foreign Communities
Active participation builds trust, improves image
Creates consumer confidence, loyal workforce

Activities may include sponsoring events, implementing sound HR policies, showing respect for societal norms, contributing directly to social and economic development

Types of Relationships in Emerging Markets

Managing Relationships With Foreign Customer
Implement feedback systems Convey long-term objectives Maintain respect for cultural differences

Forming Partnerships in Emerging Economies

Four types of alliances Cartel - Formed for operational efficiency among competitors (OPEC-like) 2. Cooperative - Formed among non-competitors (suppliers, customers) (vertical integration) 3. Competitive - Formed for a strategic (often limited) purpose among competitors (R&D) 4. Collaborative - Formed for a strategic purpose among non-competitors (towel/toiletries example)
1.

Selecting a Foreign Partner for a Joint Venture

Requires accurate assessment of prospective partner and partner and task criteria
Initial evaluation can eliminate future conflict

Both parties should be compatible

Provide complementary (but not overlapping) capabilities in order to be competitive

Selecting a Foreign Partner: Partner-Related Criteria

General Partner Characteristics
Personality traits of the partner include philosophy,
reliability, motivation, experience

Property Rights Protection

Ensures that technical and intellectual properties cannot be exploited by partner

Compatibility of Business Philosophies

Requires complete analysis of prospective partners operating strategies, policies, and procedures

Commitment
Desire to put in quality time and effort towards the project

Selecting a Foreign Partner: Partner-Related Criteria

Compatibility of Business Philosophies
Requires complete analysis of prospective partners operating strategies, policies, and procedures

Commitment
Desire to put in quality time/effort towards the project

Motivation
Risk sharing, market access, economies of scale, cost savings Higher motivational when partner has complementary resources and skills = greater efficiency

Reliability
Difficult to determine until there is some business experience with partner; decision based on past experience

Selecting a Foreign Partner: Task-Related Criteria

Refers to operational resources and skills
Marketing, R&D, Customer Service

Financial Resources
Partner should have healthy financial indicators Examine credit rating, financial ratios Sluggish past performance might restrict growth

R&D and Technical Resources

The higher the level of technical resources, the smoother the transition of technology Quality is more important than quantity Evaluate new product development/enhancement

Selecting a Foreign Partner: Task-Related Criteria

Marketing Resources
Coverage assess of target market, relations with distributors, current capabilities Important to consider past performance and current image of partner

Production Resources
Current condition of plants and fixed assets Ability to secure government incentives

Selecting a Foreign Partner: Task-Related Criteria

Organizational Resources
Managerial skills, competent staff Examine partners approach to business transactions, performance measures, personnel selection criteria Planning and control systems must be compatible

Customer Service
Necessary for repeat purchases, strong image Powerful competitive tool Assessment of geographical market coverage