Part III Flashcards
1
Q
What is an entry mode?
A
An institutional arrangement for the entry of a company’s products and services into a new foreign market. The main types are export, intermediate and hierarchical modes.
2
Q
What are the three different rules for selecting an entry mode?
A
- Naive rule
- Pragmatic rule
- Strategy rule
3
Q
What is the Naive Rule?
A
Decision-maker uses the same entry mode for all foreign markets, it ignores the markets’ heterogeneity
4
Q
What is the Pragmatic Rule?
A
Decision-maker uses a workable entry mode for each foreign market. Start with a low-risk entry mode. Not all potential alternatives are investigated
5
Q
What are Strategy Rules
A
All alternative entry modes are systematically compared and evaluated before any choice is made.
6
Q
What are transaction costs?
A
The ‘friction’ between buyer and seller, which is explained by opportunistic behavior
7
Q
What is opportunistic behavior?
A
Self-interest with guile, misleading, distortion, disguise and confusion
8
Q
What is Transaction cost analysis?
A
Concludes that, if the ‘friction’ between buyer and seller is higher than through an internal hierarchical system, then the firm should internalize
9
Q
What does externalization lead to (4)?
A
- Search costs
- Contracting costs
- Monitoring costs
- Enforcement costs
10
Q
What is externalization?
A
Doing business through an external partner (importer, agent, distributor)
11
Q
What is internationalization?
A
Integration of an external partner into one’s own organization
12
Q
What elements could result in conflicts and opportunistic actions (4)?
A
- Stock size of the export intermediary
- Division of marketing costs between producer and export intermediary
- Fixing of prices: from producer -> export intermediary, export intermediary -> customers
- Fixing of commissions to agents
13
Q
Name two examples of opportunistic behavior from export intermediary ?
A
- Exaggerating advertising and consumer service costs: normally fixed split of sales-promoting costs
- Manipulate information on market size and competitor prices to obtain lower ex-works prices from the producer
14
Q
Name two examples of opportunistic behavior from the producer?
A
- Threatening to use different intermediaries or change entry mode
- Tap the export intermediary for market knowledge and customer contracts in order to internalize (do it themselves)
15
Q
Name three ‘offsetting’ investments that counterbalance the relationship between opportunistic behavior from the export intermediary to the producer.
A
- Establish personal relations with producer’s key employees
- Create an independent identity in connection with selling producer’s products
- Add further value to the product, which creates bonds in agent’s customer relations
16
Q
What are the factors that influence the choice of entry mode (4):
A
- Internal factors
- External factors
- Desired mode-characteristics
- Transaction-specific factors
17
Q
What are intermediate modes?
A
Somewhere between using export modes (external partners) and hierarchical modes (internal modes)
18
Q
Name the three internal factors:
A
- Firm size
- International experience
- Product/service
19
Q
Explain firm size:
A
Size is an indicator of the firm’s resource availability: increasing resources -> increased international involvement. SMEs have lower resource commitment and export entry modes are more suitable for them. As firm grows, it will increasingly use hierarchical model
20
Q
Explain international experience:
A
International experience -> reduces the costs and uncertainty of serving a market -> increases probability of firms committing resources to foreign markets -> favors direct investment in the form of wholly owned subsidiaries (hierarchical modes)
21
Q
Explain product/service:
A
Products with high value/weight ratio are typically used for direct exporting
Soft services/products are more likely to choose hierarchical entry mode than hard services Product differentiation advantages -> entry barriers -> natural monopoly -> hierarchical entry
22
Q
Name the six external factors:
A
- Sociocultural distance between the home country and host country
- Country risk/demand uncertainty
- Market size and growth
- Direct and indirect trade barriers
- Intensity of competition
- Small number of relevant intermediaries available
23
Q
Explain the sociocultural distance between the home country and host country:
A
The greater the sociocultural difference between the countries -> firms will favor entry modes that involve relatively low resource commitments and high flexibility (export mode)
24
Q
Explain the country risk/demand certainty
A
Firm risks inventory, receivables, exchange rate risk, political risk. High country risk -> firm will favor entry modes that involve relatively low resource commitments and high flexibility (export mode)
25
Explain market size and growth:
Large country size -> higher growth rate -> management more likely to commit resources and consider a wholly owned sales subsidiary (hierarchical mode).
26
Explain the direct and indirect trade barriers:
Tariffs or quota on the import of foreign goods and components favor the establishment of local production or assembly operations (hierarchical modes)
27
Explain intensity of compeitition:
The greater the intensity of competition in host market, the more the firm will favor entry modes (export modes) that involve low resource commitments
28
Explain the small number of relevant of relevant intermediaries:
Small number bargaining -> market subject to opportunistic behavior -> firms will favor use of hierarchical modes in order to reduce the scope for opportunistic behavior
29
Name the three desired mode characteristics:
1. Risk-averse
2. Control
3. Flexibility
30
Explain what risk-averse
| is:
Decision-makers that are risk-averse prefer export modes or intermediate modes, because these typically entail low levels of financial and management commitment
31
Explain control:
Low level of control -> minimal resource commitment -> indirect exporting / joint ventures Hierarchical mode provide most control, but also require high commitment of resources
32
Explain flexibility:
Hierarchical modes -> involve large equity investment -> most costly -> least flexible -> most difficult to change in the short run.
33
Name a transaction-specific factor:
Tacit nature of know-how
34
Explain tacit nature of know how:
Tacit = tacit knowledge often involves complex products and services, where functionality is very hard to express
35
Indirect export:
Manufacturing firm does not take direct care of exporting, but another domestic company performs these activities without firm’s involvement in foreign sales
36
Direct export:
Producing firm takes care of exporting activities and is in direct contact with first intermediary in the foreign target market, firm’s involved in foreign sales to distributors
37
Cooperative export:
Involves collaborative agreements with other firms concerning the performance of exporting functions
38
Partner mindshare:
The level of mindshare that the manufacturer’s product occupies in the mind of the export partner
39
Name the three drives of mindshare:
1. Commitment and trust
2. Collaboration
3. Mutuality of interest and common purpose
40
What are indirect export modes:
A manufacturer uses independent export organizations located in its own country
41
What are the main five entries of indirect exporting:
1. Export buying agent
2. Broker
3. Export management company
4. Trading company
5. Piggyback
42
What is an export buying agent?
A representative of foreign buyers who are located in the exporter's home country. The agent offers services to the foreign buyers, such as identifying potential sellers and negotiating prices
43
What is a broker?
The function of a broker is to bring a buyer and seller together. The broker is a specialist in performing the contractual function and does
44
What are two features of an export management company (EMC's)?
- Export management companies (EMCs) are specialist companies set up to act as the ‘export department’ for a range of non-competing companies.
- EMC conducts business in the name of each manufacturer it represents.
45
What are the advantages of EMC's?
- EMCs can spread their selling and administration costs over more products and companies
- EMCs deal with the necessary documentation and their knowledge of foreign markets is useful
- EMCs allow companies to gain wider exposure of their products in foreign markets at lower costs than they could on their own
46
What are the disadvantages of EMC's?
- Selection of markets may be made on the basis of what is best for the EMC rather than for the manufacturer
- When paid in commission, EMCs might focus on short term sales potential instead of long term
- EMCs may be tempted to carry too many product ranges -> cannot give the necessary attention to the manufacturer’s products
- EMCs may carry competitive products that they may promote to the disadvantage of some firm
47
What is a piggyback?
An abbreviation of ‘pick-a-back’, i.e. choosing a back to ride on. It is about the rider’s use of the carrier’s international distribution organization
48
What is the advantage of a carrier?
Carrier can broaden its product range or fill the gap in product line without
having to develop and manufacture products -> low-cost way
49
What is the advantage of a ride?
Rider can export without having to establish their own distribution systems. Learn from the carries experience
50
What is the disadvantage of a carrier?
Not sure if rider maintains quality of the product sold. If carrier develops substantial market, will rider expand/ continue production?
51
What is the advantage rider?
Giving up control over marketing of its products. Lack of commitment on the part of carrier results in loss of sales
52
What is a direct export models?
The manufacturer sells directly to an importer, agent, or distributor located in the foreign target market
53
What is a distributor?
Independent companies that stock the manufacturer’s product. They will have substantial freedom to choose their own customers and price. They profit form the difference between their selling price and the buying price from the manufacturer
54
What is an agent?
An independent company that sells on to customers on behalf of the manufacturer (exporter). Usually it will not see or stock the product. It profits from a commission (typically 5-10 cents) paid by the manufacturer on a pre- agreed basis
55
What sources could help a firm to find an intermediary?
- Asking potential customers to suggest a suitable agent
- Obtaining recommendations from institutions (trade associations, chambers of commerce)
- Using commercial agents
- Advertising in suitable trade pap
56
What are the desired characteristics for intermediary?
- Size of the firm
- Physical facilities
- Willingness to carry inventory
- Knowledge/use of promotion
57
What are the principles that apply to the law of agency in all nations (3):
- An agent cannot take delivery of the principal’s goods at an agreed price and resell them for a higher price without permission
- Agents must maintain strict confidentiality regarding principal’s affairs and must pass on all relevant information
- Principal is liable for damages to third parties for wrongs committed by an agent
58
Agent incentives can be grouped into two categories:
1. High-powered incentives (HPIs): immediate, typically monetary, rewards for accomplishing specific tasks (bonus payments for exceeding sales quota, rewards for volume sold). Offering superior margins to the intermediary stand out as the most effective incentive. (short-term bonding)
2. Low-powered incentives (LPIs): motivators, most often non-monetary, do not involve immediate rewards but enable the agent to earn increased profits through continued participation in the relationship. (long-term bonding)
59
An agent whose agreement is terminated is entitled to:
- Full payment for any deal resulting from its work
- A lump sum of up to one year’s past average commission
- Compensation for damages to the agent’s commercial reputation caused by unwarranted
termination
60
What does it mean if the manufacturers are loose:
The separate firms in a group sell their own brands trough the same agent
61
What does it mean if he manufacturers are tight:
Often results in the creation of a new export assocation. Such an association can act as the exporting arm of all member companies, presenting a united front to world markets and gaining significant economies scale
62
What are the advantages of a loose firm?
Shared costs and risks of internationalization. Provide a complete product line or system sales to the customer
63
What are the disadvantages?
Risk of unbalanced relationships (different objectives). Participating firms are reluctant to give up their complete independence.
64
What is contract manufacturing?
Manufacturing is outsourced to an external partner, specialized in production and production technology
65
What are three aspects:
1. Enables the firm to develop and control R&D, marketing, distribution, sales, and servicing of its products in international markets while handing over responsibility for production to a local firm
2. Contract manufacturing offers substantial flexibility: firm can shift to another manufacturer
3. Necessary to control product quality to meet the company’s standards
66
What is licensing:
The licensor gives a right to the license against payment, e.g. a right to manufacture a certain product based on a patent against some agreed royalty.
67
What are the two main approaches to licensing:
1. 'Stand alone' licensing agreement
| 2. 'Licensing agreement'
68
Licensing agreement:
An arrangement wherein the licensor gives something of value to the license in exchange for certain performance and payments from the license
69
What is over-licensing:
Undermine a product by allowing too many products under a license
70
What is cross-licensing:
Mutual exchange of knowledge and/ or patents
71
Reasons for licensing out :
1. Concentrating on core competencies (R&D)
2. Not enough resources for foreign investment
3. Product reaches end life cycle in home country
72
Reasons for licensing in:
- Very often initiated by the license
- Can boost the profit on the short-term but affect long-term profits
- Lower development cos t
73
What is franchising?
The franchisor gives a right to the franchisee against payment, e.g. a right to use a total business concept/system, including use of trademarks, against some agreed royalty
74
What are the two major types of franchising?
1. Product and trade name franchising
| 2. Business format
75
Explain 'Product and trade name franchising'.
Similar to trademark licensing, supplier makes contracts with dealers to buy or sell products or product lines
76
Explain 'Business format franchising'
Market entry mode that involves a relationship between the entrant (franchisor) and a host country entity, in which the former transfers, under contract, a business package (or format)
77
Packages transferred by franchisor contains:
- Trademarks / trade names
- Copyright
- Designs
- Patents
- Trade secrets
78
Two key success factors which rest on the interdependence of the franchise and franchisor:
Integrity of the whole business system -> Franchisor provides a well-developed, proven business concept to the franchisee, who is motivated to follow the system as designed.
Capacity for renewal of the business system ->
Getting franchisees to share new ideas with the parent company. The franchisor needs to promote a climate of trust and cooperation
79
Explain joint venture:
An equity partnership is typically between two partners. It involves two ‘parents’ creating the ‘child’ (the joint venture acting in the market)
80
Explain Y coalition:
Each partner in the alliance/ joint venture contributes with complementary product lines or services. Each partner takes care of all value chain activities within its product line
81
Explain X coalition:
The partners in the value chain divide the value chain activities between them, e.g. the manufacturer specializes in upstream activities, whereas the local partner takes care of downstream activities
82
What are the stages in joint-venture:
1. Joint-venture objectives
2. Cost-Benefit analysis
3. Selecting partners
4. Develop a business plan
5. Negotiation of joint venture agreement
6. Contract writing
7. Performance evaluation
83
What is a hierarchical mode:
The firm owns and controls the foreign entry mode / organization
84
What is Ethnocentric orientation?
Extension of marketing methods used in home country to foreign markets
85
What is Polycentric orientation?
Manage each country as a separate market with own subsidiary and marketing mix
86
What is regio-centric orientation?
Represented by a region of the world
87
Geocentric orientation?
Transnational strategy which takes advantage of similarities between markets
88
What is domestic-based sales presentative?
The sales representative resides in the home country of the manufacturer and travels abroad to perform the sales function
89
What are the advantages of a domestic sales representative:
- Better control of sales activities can be achieved than with independent intermediaries.
90
What is a resident sales representative?
The actual performance of the sales function is transferred to the foreign market
91
What is order-making or order taking?
Sales job in foreign market that tends to order-taking will choose travelling domestic-based representative
92
What is nature of the product?
Technical products that are complex require a permanent foreign basis
93
What is foreign branch?
An extension of and a legal part of the manufacturer (often called a sales office) Taxation of profits takes place in the manufacturer’s country
94
What is subsidiary?
A local company owned and operated by a foreign company under the laws and taxation of
the host country
95
What are the reasons for choosing sales subsidiaries?
- Possibility of transferring greater autonomy, control, and responsibility to these subunits, being close to the customer
- Tax advantage: establish subsidiaries in countries with a lower business income tax than in the home country
96
What is an agent?
Curve is based on a contract with minimum annual commission, percentage of annual sales
97
What is subsidiary?
Fixed salary per annum, but will be paid a bonus if they fulfill certain sales objectives
98
What are the main reasons for establishing some kind of local production:
- To defend existing businesses
- > To defend a position in a foreign market, it might be necessary to set up local production
- To gain new business
- > Local production demonstrates strong commitment and is the best way to persuade customers
- To save costs
- > Costs can be saved in a variety of areas, such as labor, raw materials, and transport
- To avoid government restrictions
- > Government restrictions that restrict imports of certain goods
99
What are the two variants of region centers?
- Region center where downstream functions have been transferred to the region
- Region center where all value chain activities are moved to the region -> firm becomes a fully-fledged insider in the region.
100
The coordination role consists of
- Country and business strategies are mutually coherent
- One subsidiary does not harm another
-Adequate synergies are fully identified and exploited across
business and countries
101
The stimulator role consists of two functions:
- Facilitating the translation of ‘global’ products into local country strategies
- Supporting local subsidiaries in their development
102
Transnational organization:
Integration and coordination of operations (R&D, production, marketing and sales and services) across national boundaries in order to achieve synergies on a global scale
103
Three strategic motives that affect HQ location:
- Mergers and acquisitions
-> When companies of equal size merge, they need to find a neutral location for HQ
- Internationalization of leadership and ownership
-> Makes operations less sensitive to national
sentiments or ties to a specific country
- Strategicrenewal
