Topic 8 – Logistics in the Global Marketplace
Outline
1.1
Factors Influencing Companies to Enter Global Markets
1.2
International Market Entry Strategies
1.3
The Global Marketplace – Uncontrollable Environmental
Elements
1.4
The Global Marketplace – Controllable Logistics Elements
1.1 Factors Influencing Companies to Enter
Global Markets

Market potential

Geographic diversification

Excess production capacity

Advantage of a low-cost position due to experience-curve economies
& economies of scale

Products near the end of their life cycle in the domestic market that
could generate growth in the international market

Source of new products & ideas

Foreign competition in the domestic market

Global sourcing
1.2 International Market Entry Strategies
 Strategic options available:
a. Exporting
b. Licensing
c. Joint ventures
d. Ownership
1.2 International Market Entry Strategies
 Combination of options involves consideration of:
a. Commitment to international involvement
b. Types & levels of risk
c. Degree of control desired
d. Profit potential
1.2 International Market Entry Strategies

Exporting
a. Most common entry-level strategy
b. 3rd party companies can be used to carry out logistics &
marketing functions
c. Advantages:
 No direct foreign investment needed
 Less risky
 Low exit barriers
d. Useful experience-gaining tool before expansion of production
and marketing operations overseas
1.2 International Market Entry Strategies
 Exporting
e. Disadvantages:
 Difficult to compete with firms located in foreign
market
 Little control over pricing, promotion or distribution
 High dependency on export intermediaries
1.2 International Market Entry Strategies

Licensing
a. Licensing involves agreements that allows a firm in one country
(the licensee) to use the manufacturing, processing, trademark,
technical know-how & assistance, merchandising knowledge or
some other skill provided by the licensor located in another
country, to produce and/or distribute specific products or
services.
b. Licensee pays the licensor a royalty or percentage of sales.
c. Typically used by small and medium-sized companies, useful
for markets with high tariff barriers or strict import quotas
1.2 International Market Entry Strategies

Licensing
d. Advantages:
 More control over distribution since agreement usually
covers distribution strategy
 Does not require large capital outlays
 Less risky
e. Disadvantage:
 Licensee may develop into competitor
1.2 International Market Entry Strategies

Joint Ventures
a. Equity position is established with foreign partner
b. Useful for companies wanting greater control over international
operations but does not want to establish a freestanding
manufacturing plant in the foreign market
c. Only option available in countries which prohibit wholly-owned
subsidiaries
d. Requires greater knowledge of the international market
e. Higher risk accompanied by higher potential profits
1.2 International Market Entry Strategies
 Ownership
a. Can come about through acquisition or expansion
b. Acquisition minimizes start-up costs in foreign market –
locating and building facilities, hiring employees,
establishing supply chain relationships.
c. Requires more knowledge of international
compared with other entry strategies
market
d. Firm is totally responsible for marketing & distribution
1.2 International Market Entry Strategies
 Ownership
e. Advantages:
 Highest degree
operations
of
control
over
international
 Allows company to compete more aggressively on
price because of elimination of transportation costs,
customs duties and import taxes
1.2 International Market Entry Strategies
 Ownership
f. Disadvantages:
 High exit barriers because of sunk investments
 Risk of government nationalization of foreign-owned
businesses, especially in politically unstable
countries
 Exposure to exchange rate fluctuations affecting
relative value of foreign investments
1.2 International Market Entry Strategies

Countertrade
a. Countertrade is any transaction in which part of the payment is
made in goods instead of currency
b. Applies to the requirement that a firm import something from
the country in which it has sold something else
c. Countries that enforce this requirement usually has:
 Balance-of-payments problem
 Weak demand for its products
 Shortage of foreign currency or credit
1.2 International Market Entry Strategies
 Five basic forms of Countertrade:
a. Barter
 Goods of equal value are exchanged, no money is
involved
b. Buyback
 Selling firm provides equipment and agrees to buy
back a certain portion of production output
1.2 International Market Entry Strategies

Five basic forms of Countertrade:
c. Compensation
 Occurs when a barter transaction is specified as a ratio of
the value of goods being traded to the value of the product
being sold
d. Counterpurchase
 Involves more cash in the transaction, smaller volumes of
goods flowing to the multinational corporation over a
shorter period of time, and goods unrelated to the original
deal.
1.2 International Market Entry Strategies
 Five basic forms of Countertrade:
e. Switch
 A switch transaction uses at least one party outside
the host country to facilitate the trade.
 Countertraded goods or the multinational company’s
goods are sent through a third country, for purchase
in hard currency or for distribution.
1.2 International Market Entry Strategies
 Duty Drawbacks
a. Refund of Customs duties paid on imported items
b. Applicable to organizations that:
 Import goods used in manufacturing
 Export products that contain imported materials
c. Represent significant cost savings
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Economic
a. Difficulty in increasing prices - pressure put on logistics to
improve efficiency/reduce costs
b. Slow growth in specific foreign markets – productivity
pressures on logistics
c. High inflation resulting in high interest rates on short-term
borrowing to meet cash flow requirements
d. Poor investment climates in some countries or regions require
strong profit performance to provide retained earnings for reinvestment and to attract available investment monies
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Economic
e. Development of trading blocs – affects all aspects of logistics
f. Foreign currency exchange rate fluctuations – add complexity
and uncertainty to decision-making
g. Improving economic conditions in less-developed countries –
affects international trade and associated logistics operations
h. Companies & countries change their views on use of barter and
countertrade
i. Recession pressures on profits - greater corporate emphasis on
cost reduction
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Competition
Competition comes from both traditional, e.g. low cost producers,
and non-traditional sources, e.g. e-commerce companies.
Logistics responses to competition have included:
a. Increasing number of cross-border partnerships, alliances,
mergers and/or acquisitions
b. Expansion into international markets
c. Development of global communication networks operating 24
hours a day, 7 days a week
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
 Competition
(Logistics responses to competition)
d. Establishment of country and regional warehouses in
major world markets
e. Identifying and developing relationships with logistics
service providers with comprehensive suite of services
and global
coverage
f. Using 4th party logistics service providers
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
 Technology
a. New technology speeds up product obsolescence.
b. Products with shorter life cycles put pressures on
distribution and inventory management functions.
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Geography
a. Varying topography of different market regions
b. Distribution of population centers
c. Varying concentration of customer base across countries
d. All the above affect:
 Mode/carrier selection
 Warehouse location
 Inventory volumes
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
 Social & Cultural
a. Social & cultural components include:
 Language
 Education
 Religion
 Values
 Technology
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
a. Social & cultural components include: (con’t)
 Social organization
 Politics
 Infrastructure development
 Regulatory systems
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
 Social & Cultural
b. Social & Cultural trends of interest to logistics:
 Continuing shift from industrial to service economies
in major developed countries reflects a continuing
trend towards higher levels of production and
consumption of services and information in these
countries.
 Shift of production centers to lower-cost Eastern
Europe, south America and Asia
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Social & Cultural
(Social & Cultural trends)
 Ability to obtain information almost instantaneously has
affected areas such as structure of national and international
commodity markets, outsourcing of labour, materials and
components used in manufacturing, and individual views of
world markets, governments and products.
 Higher educational levels and more sophisticated customers
with greater awareness of product/service alternatives are
demanding faster and more reliable service at lower cost.
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
 Political & Legal
a. Includes following factors:
 Laws & regulations
 Political climate
 Levels of consumerism activity
 Judicial interpretation of anti-trust laws
 Trade barriers
1.3 The Global Marketplace – Uncontrollable
Environmental Elements
a. Includes following factors: (con’t)
 Transportation regulations
 Regulations on foreign-owned subsidiaries
b. Affects marketing mix, international operations, merger &
acquisition strategies, competitive responses and
personnel administration decisions
1.3 The Global Marketplace – Uncontrollable
Environmental Elements

Political & Legal
c. Certain marketing & logistics actions may be
prohibited, limited in some way, or made mandatory.
d. Three questions must be addressed by logisticians:
 What specific supply chain, corporate and/or logistics
strategies are affected?
 What are the financial impacts (i.e. costs) of trends and
changes occurring or anticipated in the political-legal
environment?
 What opportunities exist for the organization as a result of
trends and changes in the political-legal environment?
1.4 The Global Marketplace – Controllable
Logistics Elements
 Customer Service
a. More difficult to achieve consistency globally
b. Requirements and therefore costs (and profitability) vary
across countries.
c. Customer service programs must be tailored to fit local
requirements.
d. Key area for control is the order fulfillment process –
reducing cost of processing orders and shipping.
1.4 The Global Marketplace – Controllable
Logistics Elements
 Inventory
a. International and domestic inventory
systems differ in several aspects:
management
 International systems usually have more inventory
points at more levels between manufacturers and
customers.
 In-transit inventories are higher for international
logistics with similar sales volume due to more
locations, more levels and longer transportation
times.
1.4 The Global Marketplace – Controllable
Logistics Elements
 Inventory
b. Control mechanisms available in domestic markets to
influence demand and therefore inventory investment,
may not be applicable for foreign markets.
c. Different inventory policies and control procedures must
be deployed for each market area.
1.4 The Global Marketplace – Controllable
Logistics Elements
 Transportation
a. Transportation modes, infrastructure and inter-modal
combinations often have different characteristics across
countries/regions.
 Differences in degree of in-house versus outsourced
transportation
 Condition of infrastructure
ownership or subsidy
due
to
government
1.4 The Global Marketplace – Controllable
Logistics Elements
 Transportation
 Pre-dominance of one transportation mode e.g. water
transport over the rest, due to topography or availability of
modes
 Differences in transportation regulatory climate
 Service capabilities of carriers in each country may differ.
b. Selection of transportation modes & carriers are more complex
for international logistics.
c. Customization to unique market conditions is often required.
1.4 The Global Marketplace – Controllable
Logistics Elements

Warehousing
a. Differences between international and domestic warehousing
arise from:
 Size of market area served
 Types of product stored
 Availability of suitable facilities
 More complex labour management
 Requirement for bonded warehousing
 Requirement
localization
for
value-added
services
like
product
1.4 The Global Marketplace – Controllable
Logistics Elements

Warehousing
b. Basic questions to be addressed by logisticians:
 Does the market for the organization’s product justify a
local warehouse?
 Are suitable facilities available?
 Is good warehouse labour available?
 What degree of automation is available?
 How quickly do customers need products delivered?
 Are third parties an option?
 What are the relevant costs associated with public versus
private warehousing?
1.4 The Global Marketplace – Controllable
Logistics Elements

Packaging
a. Packaging requirements for international shipments differ from
domestic shipments in the following areas:
 Greater protection needed due to greater distances and
more handling involved.
 Possibility of damage and pilferage is higher.
 Climatic changes affecting temperature and humidity as
shipment cross geographic regions.
 Customs physical inspection and repacking
 Freight rates – need to minimize weight, volume
1.4 The Global Marketplace – Controllable
Logistics Elements
 Packaging
b. Some basic guidelines:
 Know the merchandise.
 Analyze the transportation environment and pack for the
toughest leg of the journey.
 Know the supplier.
 Determine packaging regulations applicable in the
country of origin, on each of the carriers and at the port
of entry.
 Arrange for prompt pickup at port of entry.
1.4 The Global Marketplace – Controllable
Logistics Elements
 Information Systems
a. Track and trace systems take on added significance for
international shipments.
b. International trade logistics software facilitate shipping
and clearance of shipments through Customs at port of
entry.
c. Global positioning systems are used for monitoring
cross- border movement of high-value, high-tech,
security-sensitive shipments.
Topic 8
Summary
and
Conclusion
1.
Companies can enter foreign markets through exporting,
licensing, joint ventures, direct ownership and countertrade.
2.
Each of these entry strategies have varying degree of control,
risk, flexibility and cost.
3.
While the components of a global logistics system may be
similar to a domestic system, the characteristics of the system
very often differ and require vastly different management and
administration.
4.
The international logistician must manage logistics operations in
market characterized by uncontrollable environmental elements
in the following areas: economic, competition, technology,
geography, social & cultural, and political & legal.
5.
At the same time, there are controllable logistics elements that
must be managed and these include customer service, inventory,
transportation, warehousing, packaging and information
systems.