Topic 10 IEBO

Module 3

Topic 10

International expansion and foreign markets

Introduction

Subtopic 10.1

Basic entry decisions

Which foreign markets to enter?

The over 200 countries in the world do not all offer the same profit potential for a firm contemplating foreign expansion. They are all different and, ultimately, the choice must be based on an assessment of a nation's long-run profit potential.

Which foreign markets to enter?

The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs and risks associated with doing business in that country. Key factors:

• size of the market (demographics),
• the present wealth (purchasing power) of consumers in that market, and
• the likely future wealth of consumers.

Attractiveness of a country

The benefit cost-risk

Least favorable

In politically unstable developing nations that operate with a mixed economy or in developing nations where speculative financial bubbles have led to excess borrowing.

Most favorable

In politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates or private-sector debt.

Timing of entry

Once attractive markets have been identified, the firm must consider the timing of entry. Entry is considered early when an international business enters a foreign market before other foreign firms, late when it enters after other international businesses have already established themselves (Hill, 2022).

Advantages and disadvantages of an early entry

Advantages of early entry

They are known as first-mover advantages, as they have the ability to preempt rivals and capture demand by establishing a strong brand name. Ex. Ray Kroc, innovated and standardized the fast-food model. This allowed for rapid expansion, including early and significant international market entry.

Advantages of early entry

The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants. Founded by Jeff Bezos, Amazon originally started out as an online bookstore, which was a major contributing factor that helped establish strong brand recognition and customer loyalty early on.

Disadvantages

However, there can also be disadvantages associated with entering a foreign market before other international businesses, which may give rise to pioneering costs (the costs that an early entrant must bear that a later entrant can avoid).

Disadvantages

These pioneering costs arise when the business system in a foreign country is so different that the enterprise has to devote considerable effort, time and expense to learning the rules of the game.

Disadvantages

Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes major mistakes; and the costs of promoting and establishing a product offering, including the cost of educating customers.

Scale of entry

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry. Entering a market on a large scale implies rapid entry and involves commitment of significant resources, and it eventually changes the competitive playing field.

Scale of entry

Firms that enter a market on a significant scale make a strategic commitment to the market, and that decision has a long-term impact and is difficult to reverse.

Scale of entry

On the contrary, a small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm's exposure to that market.

Subtopic 10.2

Entry modes

Entry Modes

Once a firm makes the decision to enter a foreign market, how should they carry it out? How can a firm determine the best mode of entry under a specific set of circumstances? Firms can use six different modes to enter foreign markets, each with its own advantages and disadvantages.

Exporting

Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market.

https://sedetec-servicios.com.mx/portfolio/viva-aerobus/

Turn-key projects

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation-hence, the term turnkey.

Turn-key projects

A turnkey project is a project where a contractor or provider takes on the entire responsibility for designing, supplying, building, and commissioning a facility or system, delivering it to the client in a fully operational, "ready-to-use" state.

Wholly Owned Subsidiaries

A wholly owned subsidiary is a company whose entire ownership is held by another company, known as the parent company. In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways.

Wholly Owned Subsidiaries

The firm either can set up a new operation in that country, often referred to as a greenfield venture, or it can acquire an established firm in that host nation and use that firm to promote its products. For example, ING's strategy for entering the U.S. insurance market was to acquire established U.S. enterprises, rather than try to build an operation from the ground floor.

https://www.titlemax.com/discovery-center/companies-disney-owns-worldwide/

Wholly Owned Subsidiaries

Marvel Entertainment is a wholly owned subsidiary of The Walt Disney Company. Disney acquired Marvel Entertainment in 2009 Similarly, Lucasfilm Ltd. LLC is also a wholly owned subsidiary of The Walt Disney Company. Disney acquired Lucasfilm in 2012.

Licensing

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.

Licensing

It is an agreement in which a foreigner buys the rights for using a patent, a registered trademark, a trade secret or a production process. Refers to granting legal permission to do something, such as manufacture a product. Govmnt = Radio & TV Patent= Copyright & Trademark

Licensing

Toy manufacturers also routinely sign licensing agreements with movie studios, giving them the legal authority to produce action figures based on popular likenesses of movie characters.

Franchise

Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.

Franchise

A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee. It is a strategy used by companies for entering new markets. This is found within partnership contracts.

Joint Venture

A joint venture entails establishing a firm that is jointly owned by two or more other wise independent firms. General Motors used a joint-venture with SAIC strategy to enter the Chinese automobile market. The most typical joint venture is a 50/50 venture.

Joint Venture

SAIC-GM is a joint venture between SAIC Motor and General Motors. This joint venture is responsible for manufacturing and selling General Motors vehicles in China.

MG GT

CAPTIVA CADILLAC

AVEO MALIBU

Google and NASA developing Google Earth.

Joint Venture

It is a new entity created jointly owned by two or more parent companies. In terms of their disadvantages, joint ventures involve partners with different backgrounds and goals, so conflicts are natural. A common use of JVs is to partner up with a local business to enter a foreign market.

Subtopic 10.3

Selecting an entry mode

All these entry modes have advantages and disadvantages. Thus, the optimal choice of entry mode will somehow involve trade-offs. However, despite the existence of such trade-offs, it is possible to make some generalizations about the optimal choice of entry mode.

Selecting an entry mode

The optimal entry mode depends to some degree on the nature of their core competencies. A distinction can be drawn between firms whose core competency is in technological know-how and those core competency is in management know-how.

Core competencies and entry mode

When a firm's competitive advantage is based on proprietary technological know-how, the firm should avoid licensing and joint venture arrangements. Unless it believes its technological advantage is only transitory, or that it can establish its technology as the dominant design in the industry.

Core competencies and entry mode

When a firm’s competitive advantage is based on management know-how, the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant.

Core competencies and entry mode

Greenfield venture or acquisition

A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, the so-called greenfield strategy, or by acquiring an enterprise in the target market, an acquisition strategy. The choice is not an easy one, and will depend on the circumstances confronting the firm.

Greenfield venture or acquisition

An acquisition strategy may be better when the market already has well-established competitors or when global competitors are interested in building a market presence. A greenfield venture, on the other hand, may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture.

Making alliances work

A good partner helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values, shares the firm's vision for the purpose of the alliance, and is unlikely to try to opportunistically exploit the alliance for its own ends (that is, to expropriate the firm's technological know-how while giving away little in return).

Making alliances work Starbucks and Tata

This joint venture brought Starbucks, an American company, into the Indian market. Tata Global Beverages, an Indian company, provided local expertise and access to its established distribution networks. This alliance allowed Starbucks to navigate the complexities of the Indian market and establish a presence there.

Starbucks and Tata

For questions: victordlgp@tecmilenio.mx Thank you!

This it the end of the class

• https://www.wallstreetprep.com/knowledge/first-mover-advantage/#:~:text=Strong%20Brand%20Recognition%20%E2%9E%9D%20The,start%20to%20emerge%20in%20the
• https://www.youtube.com/watch?v=PXiIQJBOamk
• https://www.augustachronicle.com/story/business/2007/10/14/bus-147349-shtml/14694749007/
• https://www.youtube.com/watch?v=lFN4vYpaNyM
• https://mundoejecutivopuebla.com/tim-hortons-celebra-60-anos-con-ambicioso-plan-de-expansion-en-mexico/
• https://www.elfinanciero.com.mx/monterrey/2024/04/05/ve-byd-potencia-en-nl-para-colocar-15-de-sus-autos/
• https://retailers.mx/farmacias-del-ahorro-va-al-hot-fashion-con-esta-estrategia/
• https://www.visualcapitalist.com/ranked-the-20-best-franchises-to-open-in-the-u-s/?fbclid=IwY2xjawJbnXhleHRuA2FlbQIxMAABHeHy-QgC0_Z3wCA0j5_wePjp08sgPjX4wfvfVhbGosPzYnX5zvbcQTlQ7A_aem_yaxjTo9NWQ74ncTz8MLuFw#google_vignette

Sources

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Con las plantillas de Genially podrás incluir recursos visuales para dejar a tu audiencia con la boca abierta. También destacar alguna frase o dato concreto que se quede grabado a fuego en la memoria de tu público e incluso embeber contenido externo que sorprenda: vídeos, fotos, audios... ¡Lo que tú quieras! ¿Necesitas más motivos para crear contenidos dinámicos? Bien: el 90% de la información que asimilamos nos llega a través de la vista y, además, retenemos un 42% más de información cuando el contenido se mueve.

• Genera experiencias con tu contenido.
• Tiene efecto WOW. Muy WOW.
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• Activa y sorprende a tu audiencia.