ENTRY MODES

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ENTRY MODES

• WEEK 3

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Know thy entry choices.
Export Mode Contractual Mode Investment
Mode Alliance
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EXPORTING

• INDIRECT
• EXPORTERS FROM HOME COUNTRY
• IMPORTERS IN HOME COUNTRY
• DIRECT
• FOREIGN AGENT/DISTRIBUTOR
• FOREIGN SALES OFFICE/SUBSIDIARY

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Direct Exporting

• ADVANTAGES
• Lower Incremental Investment Lower Risk
• Profits on Current Sales
• Control Over Plans
• Quicker Feedback of Information
• Learning Experience

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Direct Exporting

• DISADVANTAGES
• Transportation Costs
• Inventory Costs
• Longer Lead Times
• Control from too far
• Import Barriers

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CONTRACTUAL MODES

• LICENSING
• FRANCHISING
• MANAGEMENT CONTRACTS
• CONTRACT MANUFACTURE

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Licensing

• Licenser makes available intangible assets
  (intellectual property or technical know-how) to
  a licensee for a predetermined period in return
  for some form of payment (a disclosure fee
  royalty).

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Royalty

• Annual payment for the use of intellectual
  property or technical know-how.
• Usually assessed as a percentage of units sold by
  the licensee per year.

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Licensing

• ADVANTAGES
• Incremental income on technology.
• No capital investment.
• Circumvention of import barriers.
• Circumvention of transportation costs.
• Exports of intermediate goods.
• Possible sale of obsolete product/tech.
• Future possibilities of ownership.

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Licensing

• DISADVANTAGES
• Returns are limited in size and duration.
• Little learning experience.
• Little control over plans.
• Risk of creating a competitor.
• High cost of making and enforcing contract.

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Why are licensing contracts difficult to write?

• Price of an intangible asset cannot be correctly
  assessed until fully disclosed.
• However, upon full disclosure, price can become
  zero.

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Contracts are difficult to write and enforce
anyway!

• Environment is uncertain
• Human beings are opportunists

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How to protect your knowledge?

• Dont solely rely on legal document/system.
• Supply obsolete technology.
• Withhold key piece of technology.
• Supply a key component.
• Develop new products (BEST).

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EQUITY INVESTMENT

• SOLE VENTURES
• JOINT VENTURES
• Greenfield/Acquisition

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Equity Investment

• ADVANTAGES
• Circumvention of transportation costs.
• Circumvention of import barriers.
• May lower manufacturing costs.
• Greater control.
• Closer to market.
• Greater potential for profits.

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Equity Investment

• DISADVANTAGES
• Higher startup cost.
• Exposure to political, economic, and business
  risks.
• Longer payback periods
• Difficult to dis-invest.

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Joint Venture is

• a cooperative agreement,
• between two or more firms,
• to achieve similar objectives.
• And
• involves creation of a separate entity,
• and control is proportionate to equity.

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Joint Ventures are used...

• By smaller firms/larger projects, or those that
  lack relevant experience.
• Under environmental uncertainty.
• To complement and learn skills.
• To reduce political risk.
• To share equity/risk.
• To satisfy host-country laws.

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Success of Joint Ventures.

• Most firms enter JVs with the objective to gain
  explicit knowledge. When knowledge acquisition
  shifts the balance of bargaining power between
  partners, the cooperative basis for the JV may
  erode.

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JVs more likely to dissolve if

• Partners dont have similar strategic scope.
• Partners are not of similar size and age.
• Partners are direct competitors.
• There is transfer of technology.

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License to your own Subsidiary

• It keeps technology and capital separate.
• Ownership is clearly defined.
• Royalties/Fees are tax deductible.
• Royalties/Fees are repatriable.

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STRATEGIC ALLIANCES

• A coalition of two or more organizations to
  achieve strategically significant goals that are
  mutually beneficial.

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STAR-ALLIANCEOPERATIONS-BASED
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ATT AND BT CONCERT-ALLIANCE
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DISTRIBUTION-BASED

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DISTRIBUTION-BASED

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DISTRIBUTION BASED

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TECHNOLOGY-SWAPS
MOTOROLA

SEARS
IBM
WANG
APPLE
KALEIDA TALIGENT