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Foreign Market Analysis

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(1) assess alternative markets, (2) evaluate the respective costs, benefits, and risks of entering each one, and (3) select those with the most potential for entry or expansion.

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Assessing Alternative Foreign Markets

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-market potential -levels of competition -legal and political environment -socioculture influences

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market potential

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Data about population, per capita GDP, and public infrastructure permit firms to screen various foreign markets. The decisions a firm draws from this information often depend upon the positioning of its products relative to those of its competitors.

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level of competition

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To assess the competitive environment, a firm should identify the number and sizes of firms competing in the target market, their relative market shares, their pricing and distribution strategies, and their relative strengths and weaknesses. It must then weigh these factors against actual market conditions and its own competitive position.

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legal and political environment

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A firm may choose to forgo exporting its goods to a country that has high tariffs, in favor of exporting to one that has fewer barriers. Government stability also is an important factor in foreign market assessment. Some less developed countries have been prone to military coups and similar disruptions.

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sociocultural influences

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. Firms that fail to recognize the needs and preferences of host country consumers often run into trouble. Firms must also evaluate sociocultural factors associated with potential employees.

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Direct costs

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incurred when a firm enters a new foreign market. Such costs are associated with setting up a business operation, transferring managers to run it, and shipping equipment and merchandise.

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opportunity costs

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Because a firm has limited resources, entering one market may preclude or delay its entry into another. The profits it would have earned in that second market are its opportunity costs—the organization has forfeited or delayed its opportunity to earn those profits by choosing to enter another market first.

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benefits of entering a new market

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-sales and profits -lower costs -foreclosing of markets -competitive advantage -new technology -synergy

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risks

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-exchange-rate fluctuations -operating complexity -direct financial losses -political risks

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decision factors to choosing an entry mode

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-ownership advantages -location advantages -internalization advantages -other factors

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Ownership advantages

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are resources owned by a firm that give it a competitive advantage over its industry rivals. Because ownership advantages often determine a firm's bargaining strength, they can influence the outcome of entry mode negotiations.

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liability of foreignness

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reflects the informational, political, and cultural disadvantages that foreign firms face when trying to compete against local firms in the host country of market.

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Location advantages

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affect the desirability of host country production relative to home country production. If home country production is found to be more desirable than host country production, the firm will choose to enter the host country market via exporting. Conversely, if host country production is more desirable, the firm may invest in foreign facilities or license the use of its technology and brand names to existing host country producers.

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Internalization advantages

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make it desirable for a firm to produce a good or service itself, rather than contracting with another firm to produce it. Transaction costs are critical to this decision. If such costs are high, the firm may rely on FDI and joint ventures as entry modes. If they are low, the firm may use franchising, licensing, or contract manufacturing.

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other factors

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For example, a firm is likely to consider its need for control and the availability of resources

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Primary Advantages of exporting (to foreign markets)

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-Relatively low financial exposure -Permit gradual market entry -Acquire knowledge about local market -Avoid restrictions on foreign investment

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Primary Disadvantages of exporting (to foreign markets)

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-Vulnerability to tariffs and nontariff barriers -Logistical complexities -Potential conflicts with distributors

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Proactive motivations

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are those that pull a firm into foreign markets as a result of opportunities available there.

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Reactive motivations

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for exporting are those that push a firm into foreign markets, often because opportunities are decreasing in the domestic market.

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Indirect exporting

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occurs in several ways. For example, a firm may sell its product to a domestic customer, a domestic wholesaler, or a foreign firm's local subsidiary.All of them which will export the product, in either its original form or a modified form. In most cases, indirect exporting activities are not part of a conscious internationalization strategy by a firm. Thus, the firm will gain little international business experience from indirect exporting.

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Direct exporting

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occurs through sales to customers located outside the firm's home country. Initially, direct exporting to a foreign market is often the result of an unsolicited order.Subsequent direct exporting typically results from the company's deliberate efforts to expand its business internationally. Through direct exporting, the firm will learn about operating internationally. Such expertise can encourage it to become more aggressive in exploiting new international exporting opportunities.

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intracorporate transfer

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is the sale of goods by a firm in one country to an affiliated firm in another country. Such transfers are an important part of international trade.

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Government policies

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such as financing programs and other forms of home country subsidization can encourage exporting as an entry mode. Conversely, host countries may discourage exports by imposing tariffs and NTBs on imported goods.

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Marketing concerns

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such as image, distribution, and customer service, may also affect the decision to export. Often foreign goods have a certain product image or cachet that domestically produced goods cannot duplicate. In addition, the firm's need for quick and constant feedback from customers will influence how it handles exports.

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Logistical considerations

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also enter into the decision to export. The firm must consider the physical distribution costs of warehousing, packaging, transporting, and distributing its goods, as well as inventory carrying costs for itself and its customers. Firms choosing to export from domestic factories must also maintain competitive levels of customer service for their foreign customers.

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Distribution issues

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also influence a firm's decision to export. A firm experienced in exporting may establish its own distribution networks in key markets. If a firm lacks the expertise to market its products abroad, it will seek a local distributor in its target market. The importance of selecting a distributor whose goals and business methods are compatible with those of the exporter cannot be overstated.

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intermediaries

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third parties that specialize in facilitating imports and exports. Intermediaries include export management companies, Webb-Pomerene associations, and international trading companies.

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export management company (EMC)

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acts as its client's export department. An EMC's staff is knowledgeable about the legal, financial, and logistical details of exporting, so the exporter does not need to develop this expertise in-house. The EMC may also provide advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate.

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commission agents for exporters

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They handle the details of shipping, clearing customs, and preparing documents in return for an agreed-upon fee. In this case, the exporter normally invoices the client and provides any financing it may need

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take title to the goods

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They make money by reselling them at a higher price to foreign customers. These EMCs may offer customer financing or design and implement advertising and promotional campaigns for the product.

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Webb-Pomerene Association

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is a group of US firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating US antitrust laws. -Includes firms from same industry -Coordinates export activities -Performs promotional activities -Oversees freight consolidation -Engages in contract negotiations -Exports goods for members

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international trading company

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is a firm directly engaged in importing and exporting a wide variety of goods for its own account. It provides a full gamut of services; including market research, customs documentation, international transportation, and host country distribution, marketing, and financing. Typically, international trading companies have agents and offices worldwide

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Manufacturers' agents

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solicit/obtain domestic orders for foreign manufacturers, usually on a commission basis ex.) Japan's Soga Shosha

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Manufacturers' export agents

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act as a foreign sales department for domestic manufacturers by selling their goods in foreign markets.

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Export and import brokers

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bring together international buyers and sellers of standardized commodities, such as coffee, cocoa, and grains.

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Freight forwarders

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specialize in the physical transportation of goods, arranging customs documentation and obtaining transportation services for their clients.

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licensing

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a firm, called the licensor, leases the right to use its intellectual property (such as patents, brand names, or trademarks) to another firm, called the licensee, in return for a fee.

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Specifying the boundaries of the agreement.

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The licensor and licensee must determine which rights and privileges are and are not being conveyed in the agreement.

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Determining Compensation.

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Obviously, the licensor wants to receive as much compensation as possible, while the licensee wants to pay as little as possible. Yet each also wants the agreement to be profitable for the other, so that both parties will willingly perform their contractual obligations. Under a licensing agreement, a royalty is paid to the licensor in the form of a flat fee or a percentage of the sales of the licensed product or service.

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Establishing rights, privileges, and constraints.

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Licensing agreements usually limit the licensee's freedom to divulge information it has obtained from the licensor to third parties. They also specify the type of records the licensee must keep regarding sales of the licensed products or services, and define standards regarding product and service quality. The agreement also details how disagreements will be resolved.

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Specifying the agreement's duration.

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The licensor may view the agreement as a short-term, low-cost strategy designed to obtain knowledge about the foreign market. However, if the contract's duration is too short, the licensee may be unwilling to invest in consumer research, distribution networks, or production facilities. As a rule, the greater the investment costs incurred by the licensee, the longer the duration of the licensing agreement.

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Advantages of international licensing

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-Low Financial Risk -Market Assessment -Sales Opportunities

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Disadvantages of international licensing

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-Limited Market Opportunities -Potential Litigation -Competitive Issues

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royalty

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compensation under a licensing agreement.

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Franchising

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allows the franchisor more control over the franchisee and provides more support from the franchisor to the franchisee than is the case in the licensor-licensee relationship. A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.

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Basic Issues in International Franchising

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-Franchise Unique Products and Advantageous Operating Procedures -Transferability to Foreign Locations -Franchise Domestic Success -Foreign Investors

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advantages of international franchising

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-Product and System -Low-Cost Expansion -Learning Opportunities

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disadvantages of international franchising

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-Shared Revenues -Increased Complexity -Quality Control

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contract manufacturing

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to outsource most or all of their manufacturing needs to other companies. This strategy reduces the costs that firms need to devote to the physical production of their products. By using this approach, international businesses can focus on that part of the value chain where their distinctive competence lies. They also can benefit from any location advantages generated by host country production. However, they also surrender control over the production process, which can lead to quality issues or other unexpected problems.

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management contract

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is an agreement whereby one firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon time, in return for monetary compensation. For its services, the first firm may receive either a flat fee or a percentage of sales. The management contract may also specify performance bonuses based on profitability, sales growth, or quality measures. Management contracts allow firms to earn additional revenues without incurring investment risks or obligations.

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turnkey project

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is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation.

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B-O-T project

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the firms builds a facility, operates it, and later transfers ownership of the project to some other party.

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There are three methods for FDI:

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(1) building new facilities (called the greenfield strategy), (2) buying existing assets in a foreign country (called the acquisition strategy or the brownfield strategy), and (3) participating in joint ventures.

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Benefits of FDI

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Foreign Direct Investment offers the firm increased control over its international business operations, as well as increased profit potential. -Increased Control -Profit Potential -Local Factories (host countries prefer dealing with local factories)

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Challenges of FDI

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-Economic Risks -Political Risks -Operating Complexity -Government Policies

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greenfield strategy

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involves starting a new operation from scratch.

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Greenfield Strategy advantages

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-Select the most useful site -Construct modern facilities -Reap economic development incentives -Start with a clean slate -Get acclimated to new business culture

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Greenfield Strategy Disadvantages

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-Implementation takes time and patience -Location may be costly or unavailable -Must deal with government regulations -Must recruit and train a local workforce -May be stigmatized as a "foreign firm"

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acquisition strategy (brownfield strategy)

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buying existing assets in a foreign country.

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Acquisition Strategy advantages

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-Control Over the Firm's Resources -Generates Immediate Revenues -Adds No New Capacity to the Industry

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Acquisition Strategy Disadvantages

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-Assumes the Firm's Liabilities -Inherits Unresolved Problems -Requires Substantial Up-Front Spending

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joint venture

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involves two or more firms that agree to work together and create a jointly-owned, separate firm to promote their mutual interests. The number of such arrangements is burgeoning as rapid changes in technology, telecommunications, and government policies outstrip the ability of international firms to exploit opportunities on their own.

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