Chapter Three

International
Business Entry
Strategies
1
2
3
4
5
6
3.2. Basic issues in international
business

 An organization wanting to go
international/global business faces three major
issues
A. Targeting - which countries, which segment,
how to manage and implement marketing
effort, how to enter- with intermediary or
directly
B. Sourcing- where the seller to obtain product,
make or buy?
C. Investment and control- determine the
extent of controls – joint venture, partner,7
 Cunningham(1986) identified five
strategies used by firms for entry to
international business
1. Technical innovation strategies-perceived
and demonstrable superior new products
2. Product adaptation strategy- modification of
the existed products
3. Low price strategy- penetration prices
4. Availability and security strategy- overcome
some related problems
5. Total adaptation and conformity strategy-
foreign producers give straight copy and
confirmation 8
3.3. Modes of international business
entry
1.Exporting
- Can be define as the marketing of goods produced in one
country in to another.
- Exporting is the most traditional and well established
forms of operating in global markets
- The quickest and simplest way of entry strategy.
No direct manufacturing is required in an overseas
country
But, significant investment in marketing may be required
It needs minimum changes in the company's product line,
organization, investment and company’s mission 9
Advantages of exporting
Minimum risky since manufacturing is home
based
diversification- selling to multiple markets
Give opportunity to learn overseas market
before direct investment
Greater marketing leads to greater
production which in turn can lead to larger
economic of scale
Increase sale volume and profits
Expand life cycle of products
10
Disadvantages of Exporting
Lack of control in overseas market
Extra cost will be incur
Need product modification
Need export licenses and
documentation
Need market information and careful
planning
Need to met the import/export
requirements
11
 Exporting can be either direct or indirect

1. Direct Exporting
Involves firms shipping goods directly to a
foreign market
Overseas sales in which a producer or supplier
controls all activities and collects all
drawbacks.
The most popular option -is achieved by
charging personnel from the company to give
them greater control over their operations.
Direct selling also give the company greater
control over the marketing function and the
opportunity to earn more profits. 12
Advantages of direct exporting

Customer relations : You get to know your

clients and so are able to offer better services.
Better confidences: The clients feel more
confident and secure since they are directly
dealing with you.
Profits : The strategy offers potential for higher
profits because of more direct contact. No
intermediaries imply greater profits
Control : You have total control over the
13
Disadvantages of direct exporting

Lack of Manpower : Building a client base requires

people.
Since you are exclusively in charge, every aspect of the
business will demand your attention.

Lack of Resources :A business requires

considerable amount of money, time and effort.
You should give serious thought to whether you will be able
to provide these adequately.

It would be wide livery etc.

14
Reduced Customer Care : You may not be able to
communicate back to clients as quickly as an agent.
The business would also require online support if you are
dealing in technical products.
In that case, clients may also have technical questions that
you must be prepared to answer.

Affected by deterioration of exchange rates.

Inappropriate for goods with a short work life and
are unlikely to be exported.

15
 Channel of distribution to direct
exporting
 Once a company has been organized to handle
exporting, the proper channel of distribution needs
to be selected in each market.
 These channels include sales representatives, agents,
distributors, retailers, and end users.
 Sales representatives
-The representative uses the company's product literature
and samples to present the product to potential buyers.
 Agents
-The widely misunderstood term agent means a
representative who normally has authority, perhaps
even power of attorney, to make commitments on
behalf of the firm he or she represents. 16
 Foreign retailers

-A company may also sell directly to a foreign

retailer, although in such transactions, products
are generally limited to consumer lines.
 Direct sales to end users

-A business may sell its products or services

directly to end users in foreign countries.
 Direct selling over the Internet

17
The disadvantages of using an
intermediary are:
the intermediary takes a margin
they still requires sales support
you have no direct contact with the end customer
there's less control over the actual final transaction
fewer opportunities to learn about the overseas
market,

18
 2. Indirect exporting
mainly used by producers in the transportation,

Automobile and Equipment manufacturing industries.

Indirect exporting entails contracting with intermediaries in

the producer's home country to perform export functions

It can also involves selling to an intermediary in the country

where you wish to transact business.

Distributors are both wholesaler and retailer

 Distributors--The foreign distributor is a merchant who

purchases merchandise from an exporter and resells it at a profit.

Selling to or through an intermediary is a relatively cheap and

straightforward way to enter a new mark 19

 The advantages of indirect exporting

It's an almost risk-free way to begin.

It demands minimal involvement in
the export process.
It allows you to continue to
concentrate on domestic business.
You have limited liability for product
marketing problems

20
 The disadvantages of indirect exporting

profits are lower.

less control over your foreign sales.
very rarely know who your customers
are,.
You are a step removed from the actual
transaction.
The intermediary might also be offering
products similar to yours, including directly
competitive products,
Your long-term outlook and goals for your
export program can change rapidly,
21
 2.Licensing
A license may be granted by a party
("licensor") to another party ("licensee") as
an element of an agreement between those
parties.
A shorthand definition of a license is "an
authorization (by the licensor) to use the
licensed material (by the licensee).“
A licensor may grant permission to a
licensee to distribute products under
a trademark. With such a license, the
licensee may use the trademark without
fear of a claim of trademark infringement by
the licensor. 22
Licensing: Licensing is defined as "the
method of foreign operation whereby a firm in
one country agrees to permit a company in
another country to use the manufacturing,
processing, trademark, know-how or
some other skill provided by the licensor".
It is quite similar to the "franchise" operation.
Coca Cola is an excellent example of licensing.
In Ethiopia, have a license to make Coke.
Licensing involves little expense and
involvement.
The only cost is signing the agreement and
policing its implementation. 23
 Licensing gives the following
advantages:
 Good way to start in foreign operations and open
the door to low risk manufacturing relationships
 Linkage of parent and receiving partner interests
means both get most out of marketing
effort
 Capital not tied up in foreign operation
 Provides additional profitability with little initial
investment
 Provides method of avoiding tariffs, quotas, and
other export barriers
 Attractive return on investment(ROI)
 Low costs to implement 24
 The disadvantages are:
o Limited form of participation - to length
of agreement, specific product, process or
trademark
o Potential returns from marketing and
manufacturing may be lost
o Partner develops know-how and so
license is short
o Requires considerable fact finding,
planning, investigation and interpretation
o Lack of control
o Licensee may become competitor
o Licensee may exploit company resources 25
26
27
The characteristics or
features of a franchise
1. Well established business
2. Needs limited investment
3. Easy entry in new markets
4. Business has large establishments
5. Helps in diverting business risks
6. Results in a large turnover
7. Separates labor and specialization
8. Allows use of brand name and trademark
9. Business is based on mutual agreement
10. Success needs a long-term relationship
28
29
30
31
32
33
34
35
 3.4.5.Direct
investment
A company would directly construct a fixed
asset within a foreign country,
With the aim of manufacturing a product
within the overseas market
capital expenditures and any related
sunk costs with the capital expenditure by
an investor.
Direct investment has the most control and
risk attached
Is an investment in the form of a controlling
ownership in a rewards and assumes all of
the risks business in one country by entity
36
 Types of direct
investment
 Horizontal direct investment- when the
firm duplicates its home country based
activities at the same value chain stage in a
host country through direct investment
 Plat form direct investment- direct
investment from a source country in to a
destination country for the purpose of
exporting to a third country
 Vertical direct investment – takes place
when a firm moves upstream or downstream
in different value chain-or performs value
chain activities
 Diversification- different business 37 in
 Mode of direct
investment
Some of the direct investment modes of
the international business are:
A. Wholly –owned subsidiary
is a company that is completely or partly owned
and wholly controlled by another company that
owns more than half of the subsidiary's stock.
The subsidiary can be a company, corporation,
or limited liability company. The controlling
entity is called its parent company, parent,
or holding company.
The owner of a wholly-owned subsidiary is
known as the parent company or holding
company 38
 B. Mergers and
acquisitions
Mergers and acquisitions refers to the aspect of
corporate strategy, corporate finance and management
dealing with the buying, selling, dividing and combining
of different companies and similar entities.
i. Merger
 The act of merging of two or more entities into one,
through a purchase or a pooling of interests is called
merging.
 It may be the combination of two or more companies,
either by the creation of a new organization or by
absorption by one of the others.
 This is to form new ownership structure and controlling
system and to share resources in order to achieve
common objectives.
39
 ii. Acquisition
An acquisition is the purchase of one business or
company by another company or other business
entity.
Acquisition" usually refers to a purchase of a
smaller firm by a larger one.

Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly
different things. When one company takes over
another and clearly establishes itself as the new
owner, the purchase is called an acquisition.
Whereas, when two firms agree to go forward as a
single new company rather than remain separately
owned and operated.it is called merge
40