CHAPTER 13
ENTRY AND
EXPANSION
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Copyright © 2011 John Wiley & Sons
1. Learn how firms gradually progress through an
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internationalization process
2. Understand the strategic affects of
internationalization of the firm
Learning
Objectives
3. Study the various modes of entering
international markets
4. Understand the role and functions of
international intermediaries
5. Learn about the opportunities and challenges of
cooperative market development
6. Understand how firms can overcome market
barriers by either building competitive
capabilities from scratch or through acquisition
7. Observe a model linking managerial
commitment, international expansion, and
corporate concerns
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The Role of Management
 Dynamism and commitment of managers are essential
for international operations
 The issue of managerial commitment is a critical one
because foreign market penetration requires:
Market
Development
Activity
Sensitivity
Toward Foreign
Environments
Research
Innovation
 Going international means that a fundamental
strategic change is taking place
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The Role of Management
 Steps in developing international commitment
Become aware of international business opportunities
Determine the degree and timing of the firm’s
internationalization
1.
2.
 International orientation grows over time
 Management is often too preoccupied with short-
term issues to engage in long-term planning


Unsolicited orders – Unplanned business opportunities
that arise as a result of another firm’s activities
Accidental exporters – Firms which participate in
international trade due to active outside demand rather than
inside planning
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Motivations to Go Abroad
Proactive Motivations
Reactive Motivations
 Profit advantage
 Competitive pressures
 Overproduction
 Unique products
 Declining domestic sales
 Technological
 Excess capacity
advantage
 Exclusive information
 Tax benefit
 Economies of scale
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 Saturated domestic
markets
 Proximity to customers
and ports (physical and
psychological distance)
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Focus on Entrepreneurship: An
International Bug
Tierra Dynamic, a Phoenix-based environmental
cleanup company, has successfully entered world
markets. First, the company developed a bacteria
that eats spilled hydrocarbons at an accelerated
rate and then discovered a void in the world
market for the bacteria. Next the company
identified locations needing cleanup and found
local partners in those locations. The company
then set up shop on foreign soil to take advantage
of these market opportunities.
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Strategic Affects of Going International
 Wide range of Issues to Consider:
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Service delivery
Strategic considerations such as government regulation compliance
Start-up issues such as communication with customers
Operational matters such as information flows and mechanics
 Companies must determine their preparedness for
internationalization by assessing strengths and
weaknesses
 Understanding the changes in risk and profitability can
help management overcome the cost of going
international
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Telecom Companies Find New
Revenue in Global Markets
As the nation’s economy has faltered in 2008 and 2009, many U.S.
companies have started looking overseas both to cut costs and to
increase growth. While the downturn has had an impact beyond our
borders, surveys of U.S.-based multinationals indicate only a slowing
of the meteoric pace of globalization that has characterized this decade
to date. In other words, their overseas expansion continues in earnest.
For telecom agents feeling the squeeze on domestic business, helping
more U.S. companies go global or improve their global operations by
supporting their telecommunications infrastructure requirements may
be an opportunity they can no longer afford to ignore.
Source: Phone Plus Magazine:
http://www.phoneplusmag.com/articles/2009/08/going-global-agents-find-new-revenue-selling-inte.aspx
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Entry Development Strategies for
Exporting and Importing
 Indirect involvement – Use of an intermediary to
deal with foreign customers or firms
 Direct involvement – Working with foreign
customers or markets with the opportunity to
develop a relationship
 Transaction cost theory – Firms will evaluate
and compare the costs of integrating an operation
internally as compared to the cost of going global
 Some firms are born global, starting out with an
international orientation or quickly developing one
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How a Trade Intermediary Can Offer
Assistance
1.
2.
3.
4.
5.
Knows foreign market competitive conditions
Has personal contacts with potential foreign buyers
Evaluates credit risk associated with foreign buyers
Has sales staff to call on current foreign customers
in person
Assumes responsibility for physical delivery of
product to foreign buyer
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Export Management Companies
 EMCs specialize in performing services as commission
representatives or distributors
 EMC Roles:


Agent – Developing foreign business and sales strategies
Distributor – Purchasing products and assuming trading risk
 Compensation of EMCs


Fee for activities performed as a retainer
Price break for international sales
 Power Conflicts Between EMCs and Clients


Once a foreign market is penetrated, the EMC faces the continuous
problem of retaining a client
Clear arrangements must be made to avoid or minimize conflict
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Tradewinds Global
Tradewinds Global is an export management company representing
the export sales of North American manufacturers into international
markets. The company serves as a liaison and consultant between the
manufacturer who is looking to expand into foreign markets and
foreign buyers seeking to purchase consumer goods from U.S. and
Canadian manufacturers.
Located in Oahu, Hawaii, Tradewinds is ideally situated to facilitate
trade between North American firms and those within the emerging
economies in Southeast Asia.
Source: Tradewinds Web Site: http://www.tradewinds-global.com/
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Trading Companies
 Concept made popular by the European trading
houses from earlier centuries
 Japanese sogoshosha is the most successful
trading company
 Expansion of Trading Companies
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

An export trading company allows businesses to band
together to export or offer export services
Export trading company legislation is designed to improve the
export performance of small and medium-sized firms
Banks can participate in ETCs, allowing better access to capital
and making trading transactions easier to accomplish
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Private-Sector Facilitators
 Supply knowledge and information, but do not
participate in the transaction
 Come from both the private and public sector
 Private sector facilitators include:
Other Firms
in the
Industry
Distributors
Chambers of
Commerce
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Banks and
Other Service
Firms
Other Business
Associations
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Public-Sector Facilitators
U.S.
Department
of Commerce
Small Business
Administration
State and
Local
Organizations
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ExportImport Bank
Educational
Institutions
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Licensing
 International Licensing:
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A firm permits another to use its intellectual property for a royalty
Does not require capital investment or detailed involvement
Exploits research and development that has already been conducted
Avoids host-country regulations and cultural problems
Allows a company to test the market
 Trademark licensing – Permits the names or logos to
be used on products in exchange for payment
 Disadvantages:



Limited form of foreign market participation
May actually hinder future expansion
A company could create its own future competitor
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Focus on Culture:
TV Program Licenses are
International
With the privatization of many state -run television
enterprises during the 1980s, most markets abroad
have relied on American-produced TV shows to fill
their airtime because of a lack of knowledge and
skills to create television programs independently.
Over time, the situation abroad has changed, and
local stations have become more adept at developing
and producing their own programming.
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Franchising
 Granting the right by a parent company (the franchisor) to an
independent entity (the franchisee) to do business
 Major forms of franchising:
 Manufacturer-retailer systems (e.g. car dealerships)
 Manufacturer wholesaler systems (e.g. soft drink companies)
 Service-firm retailer systems (e.g. fast-food outlets)
 Keys to Success
 Offer unique products or selling propositions
 Offer a high degree of standardization
 Be adaptable to local circumstances
 Reasons for the international expansion:
 Market potential
 Financial gain
 Saturated domestic markets
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Inter-firm Cooperation
 Strategic Alliances with suppliers, customers,
competitors, and companies in other industries
 Reasons for Interfirm Cooperation


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
Market development
To share risks
To share resource requirements
To block and co-opt competitors
 Types of Interfirm Cooperation
 Informal Cooperation – Partners work together without a
binding agreement
 Contractual Agreements – Joint efforts in specific areas or for
outsourcing
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Types of Inter-firm Cooperation
Contractual
Agreements
Informal
Cooperation
Equity
Participation
Joint
Venture
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Consortia
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Stateless Corporations
In the 1990s, a new type of company emerged in global business: The
stateless corporation developed products in several countries,
practiced diversity, and had shareholders on numerous continents
long before traditional companies adopted these practices. These
companies established joint ventures, partnerships, and other
significant changes in operations to take advantages of the benefits of
going global. These benefits include:
• Solving trade problems
• Avoiding political problems
• Side-stepping regulatory hurdles
• Winning technology breakthroughs
By taking advantage of the benefits of global operations, these
companies set the stage for today’s multinational corporations.
Source: AllBusiness: http://www.allbusiness.com/management/453036-1.html
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Managerial Considerations
 Find the right partner first
 The more formal the arrangement, the greater the
care that needs to be taken in negotiating the
agreement
 The cultures of the two parties must be blended
 Must be able to adjust to changing market
conditions
 Must consider government attitudes and policies
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Full Ownership
 Company may believe that no outside entity should
have an impact on corporate decision making
(ethnocentric view)
 Ownership decision could be based on financial
concerns
 Consider how important total control is to success
 Increasingly, the international environment is
hostile to full ownership by MNCs
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A Comprehensive View of International
Expansion
Domestic
Focus
Concerns
• Information
• Mechanics
• Communication
Motivation
• Proactive
• Reactive
• Sales Effort
• Service
• Regulations
Stages of
Management
Commitment
• Aware
• Interested
• Trial
• Evaluation
• Adaptation
Intermediaries
• EMC
• Trading Companies
• Facilitators
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Alternate
Strategies
• Trading
• Export/
Import
• Licensing/
Franchising
• Local
Presence
• Alliances
• Ownership
MultiNational
Focus
Czinkota: International Business, 8e