ANSWERS TO QUESTIONS FOR DISCUSSION

8.1 What are the major nonexport modes of entry into foreign markets? How does strategic focus
relate to such market entry modes?

The major nonexport modes of entry are (1) establishing a manufacturing plan, (2) setting up of assembly
operations, and (3) forming a strategic alliance with one or more other companies.

The strategic focus of the company, including its relative emphasis on profitability, productivity, volume,
risk, and control, will be factors in determining the appropriate entry mode.

8.2 What are the major considerations taken into account by the international marketer in a
decision to engage in some form of foreign area production?

The major considerations are the size of the market which can be served, and opportunities to expand
that market, costs of production, government barriers to continued imports, government incentives or
barriers to manufacturing there, and control.

8.3 If a company were contemplating establishing a manufacturing facility in a foreign market,

why might it decide to wholly own the facility rather than partially own it? Similarly, why might
it prefer partial ownership?

While establishing a wholly owned facility generally requires a greater commitment of capital, it provides
greater control. Partial ownership may result in better government and business relations in the foreign
market if the partner is well connected/has a good reputation.

8.4 When developing manufacturing operations in foreign markets is it better for the international
marketer to seek out merger/acquisition possibilities or start from scratch (a greenfield
investment)? Explain.

Which approach is better depends upon the situation. A greenfield investment usually is more time
consuming and involves problems in facility setup, recruiting and training labor, setting up the
management team, and usually large capital commitment. An acquisition usually allows a faster start-up,
and provides existing management, labor, facilities, and marketing organization with all their strengths
and weaknesses. Acquisitions often result in some problems in establishing or merging differing
managerial approaches. Local participation in ownership may be required by some governments.

8.5 Why might an international marketer who is involved in foreign production still have
problems concerning channel control and cooperation? Would such a marketer handle
channel conflict differently than the international marketer who exports?

The international marketer with foreign production may still have problems in gaining cooperation and
control. There may be problems in developing modified managerial approaches and operating methods
that work well in the foreign country. Securing cooperation from other companies in the distribution chain
may also be a problem. The producer will generally have both greater knowledge of local requirements
and a greater ability to rapidly respond to those requirements than will an exporter.
8.6 What is a strategic alliance? Why are these alliances so popular and who benefits?

Strategic alliances are cooperative ventures between two or more companies designed to exploit some
marketing, manufacturing, or R&D opportunity. They are increasingly popular because, if properly set up
and operated, they enable the participants to use the strengths of each to achieve more jointly than they
could individually. All participants must benefit or the alliance will not last.
8.7 What are the key essentials for a strategic alliance to be a success?

Goal compatibility among the participants, strategic advantage for each, interdependence, commitment,
communication and conflict resolution, and effective planning and coordination.

8.8 Licensing seems to be a fairly safe way for a manufacturer to produce in a foreign market for
the first time. Comment.

Licensing is a relatively easy and low-cost method of entering a foreign market. It may not always be safe,
however. See the answer to Question 8.9.

8.9 Although licensing and contracting may appear to be desirable, they have drawbacks. What are
the drawbacks?

The licensor or contractor may gain enough knowledge to become a competitor, lack of control over
production that may lead to quality problems, lack of control over marketing that may lead to inadequate
market exploitation, and it may be difficult to coordinate the activities of a licensee with other entities in
the worldwide marketing plan.

8.10 Why might a company not choose outsourcing even when production costs are sufficiently
lower?

A company might be concerned with training a potential competitor, loss of intellectual property, problems
in finding a satisfactory manufacturer, loss of control in manufacturing, possibility that it will be accused of
exporting jobs, or exploiting or mistreating foreign workers.

8.11 Why might an international marketer prefer a joint venture to a licensing arrangement?

Joint ventures may be encouraged or required by certain host governments. They may be preferred
because joint ownership encourages each partner to contribute in areas where he/she is strong, provides
a feeling of cooperative effort, and when successful accomplishes more at lower risk and cost than could
be achieved by the partners working independently.

8.12 In running a jointly owned facility in a foreign market (including a joint venture), it is not
necessary to own more than 50% to maintain operational and management control. Discuss.

The percentage of equity required for control depends upon the circumstances. Control with less than
50% equity may be possible if the remaining equity is divided among two or more other companies, or if
the outside investor controls essential resources required by the jointly owned facility. If the local company
controls essential resources, or has governmental support, the outside investor may not have effective
control even with more than 50% equity. Exactly 50% equity for each of two partners may just lead to
stalemate.
8.13 Why are management styles, and any cultural difference that exist in styles, important in all
types of market entry modes involving partners?

Management styles affect many aspects of operations and relationships. For example:

a differences in communications styles may lead to misunderstandings and conflict;

b the ways in which decisions are made may result in conflict if one partner prefers consultation with
the reaching of consensus desired/required, and the other prefers less input and top-down decisions;

c junior managers and other employees may respond in unexpected/undesired ways to directions and
orders that are given in a way (management style) to which they are not accustomed; and

d misunderstandings and conflicts may occur when partners have different modes of personal
interaction.

8.14 Select a company that has chosen direct investment in a foreign market and a company that
has established a strategic alliance abroad. Analyze why each company made the decision it
did. Explain why you would or would not agree with that decision.

Students answers will vary. Some students will note that many international marketers use more than one
form of envy mode for different products and/or countries.

(The instructor may wish to use an example like that of Nissans and Toyotas approaches to beginning
manufacturing in the United States. Nissan entered with a wholly owned plant in Tennessee. Toyota,
which was concerned about how to deal with unionized American labor and with American suppliers,
entered a joint venture with General Motors in Fremont, California. Toyota followed up this successful
learning experience with the building of a wholly owned plant in Kentucky.)

8.15 Choose a company that has made both a direct investment in a foreign country and has
become part of a strategic alliance in that same or another country and analyze why the
company chose those particular forms of entry.

Student answers will vary, but should include consideration of some of the factors of risk, cost, control,
access to technology, or others discussed in the text. (See the Toyota example above.)

ANSWERS TO CASE QUESTIONS

8.1 Terralumen S.A.

1. What should be Francisco Alvarezs position at the directors meeting?

Senor Alvarez is faced with a difficult situation. The American parent does not understand Spanish
business culture, the Spanish real estate market, or the Spanish labor market. They have not evidenced
any interest in learning about these factors, and apparently do not recognize their importance. Their new
plan for accelerated expansion based on the report of an American consulting firm appears to have been
similarly oblivious to these factors. (Did the consulting firm simply provide a report that projected what
Delta wanted in the way of rapid expansion without really testing the plans feasibility?).
Since the Americans seem unwilling or unable to adjust their approach to the Spanish environment, Senor
Alvarez should do two things. He should prepare American-style arguments for the meeting itself, and he
should begin to formulate a plan of action in case of dissolution of the joint venture.
Regarding the proposed accelerated expansion, the American-style arguments should include a
quantitative analysis of the resources required for, the potential sources of the required resources, and
the feasibility/infeasibility of the plan. The large amount of funds required for capital investment would not
be available from current operations of Terralumen, which had not even been able to pay current debt
obligations to their Spanish bank out of earnings. It would likely not be possible to attain sufficient rental
space to accommodate the proposed increase. Hiring and training of the large number of people required
would not be very risky with the requirements of Spanish law. Senor Alvarez should quantify all of these
costs and problems insofar as possible, and sum up with the amount of additional capital that would be
required. He should also present a short written summary of the reasons legal, financial, and otherwise
in the Spanish environment, which make such expansion risky and infeasible.

Regarding Deltas proposed changes in contract terms, Senor Alvarez should maintain his position. It is
not apparent that Delta intends to make any contributions that would justify Terralumen making any
concessions.

2. Can the joint venture between Terralumen S.A. and Delta Foods survive? What do the
partners need to make this happen?

From the facts provided in this case, it appears unlikely that the joint venture can survive. The demands of
Delta, and the negotiating stance they are taking, appear to indicate a lack of understanding of
Terralumens contributions to and importance in the joint venture, as well as a complete lack of
understanding of requirements for successful operation in the Spanish market. Deltas approach seems to
combine a high level of ethnocentrism with substantial arrogance.

In order for the joint venture to survive, Delta needs to change its stance. If Delta does that, Terralumen
could make some minor concessions on other items.

3. If Delta does want out of the venture, what terms should be set by Terralumen?

It can be expected that the restaurants are operated using the Blue Ridge name, and this name would
almost certainly remain with the Blue Ridge corporation.

There are three basic possibilities for ending the joint venture: Terralumen might be able to buy out
Deltas interest, might sell its interest in the chain to Delta, or they might divide the assets. It would be
best if this could be done by negotiation, but if they have to go to court (in Spain, where the subsidiary
must be, by law, incorporated), Terralumen should have an advantage. It is probably in the best interest of
Terralumen to buy out Deltas share in the partnership. Terralumen has acquired valuable experience in
establishing, staffing, and operating fast food outlets, and should be able to use this experience in
developing a chain of their own. It would be helpful if they could retain control of all or most of the outlets,
changing their name and focus as appropriate. If Terralumen has to sell its interest, it should not do so
unless it can gain a substantial capital gain on its contributions. If it must divide the assets, it can attempt
to obtain the best of the locations for itself.

(Note to instructors: Though very well disguised, this is a real case. Delta, the new parent of Blue Ridge,
did not have a good understanding of the requirements for developing and running restaurants overseas,
and of course additionally suffered from the problems noted in 1 and 2 above. Terralumen bought out
Deltas share, and went on to establish a very successful chain of specialty fast food restaurants in Spain.
Blue Ridge had little success in France and Germany, and virtually disappeared in Spain.)
8.2 GG Farm Machinery Company
1. Do you agree with the decision made by Marcel Ger? Explain your answer.

Marcel Gers decision seems to be appropriate given the small size of his company, his lack of interest in
spending much time or effort in getting deeply involved in activities in Australia, his good patent
protection, and the fact that the best candidate for cooperation wants to be a licensee rather than a
distributor. Table 8.5 does not explain fully the entry on duties. It says that duties exist for some products,
but it is unclear if there are duties on GG Farm Machinery Companys specialized piece of machinery.
Surely the marketing consulting firm should have determined specifically what the duty rate is.

Licensing is particularly appealing to firms that have technology, product, or manufacturing expertise who
lack the resources, desire, or experience to enter foreign markets. There are virtually no risks and the
only costs are in negotiating and signing a mutually acceptable agreement, and checking on and
controlling the implementation. The major disadvantages are loss of control, potential returns from
marketing and manufacturing may be lost, and the licensee may turn itself into a competitor when the
agreement expires. A further drawback is that the licensor learns nothing about the foreign market. In
summary, licensing is a low-cost method of potentially making relatively easy money in the short term.

2. What other modes of market entry into the Australian market might GG have considered?
Why are these viable alternatives?

They might have considered:

A Joint Venture. A joint venture provides a more extensive form of participation in foreign markets.
The major advantages are the sharing of risk and the combined strengths of the two partners.
Joint ventures allow the partner to gain access to market knowledge and build its expertise in this
area. The main disadvantages are the costs of control and coordination in working with a partner
and the potential for conflict. Over time, many joint ventures are dissolved because the partners
perceived inappropriate allocation of costs versus returns (i.e., each partner felt the other was
contributing too little and getting too much).

Direct Investment. This would have involved setting up a plant in Australia. This would require an
investment of time, effort, and money that are probably far beyond what GG is willing to consider.
The advantages of direct investment where it is feasible are (1) control is maintained, (2) market
knowledge is gained, and (3) all profits accrue to the firm.

Exporting directly or indirectly, as discussed in Chapter 7.

8.3 VW in China
1. Evaluate Volkswagens strategies with regard to marketing.

Volkswagens marketing decisions were limited by government regulations, involved considerations of the
long-term potential of the market, and were directly tied to its changing entry strategies. Volkswagens
early entry into the Chinese market, and its entry decisions, enabled it to become the nations market
leader in automobile sales. It made wise decisions in selection of partners that could provide political and
economic support, and could directly increase the market for its automobiles. (See the answer to question
2 immediately below.) Its cooperation with city of Shanghai resulted in the city setting up a taxi company
using VWs Santanas. As the market in China expanded, and competition increased, Volkswagen added
additional models to its line. It has also lowered prices as other companies have expanded manufacturing
in China and competition has increased. With Chinas entry into the WTO and attendant lowering of tariffs,
the company is also increasing imports of specialized models that cannot be sold in sufficient numbers to
justify local manufacturing. These models add to its prestige. Originally, a partner had the responsibility
for marketing the cars produced in its initial joint venture. VW has now developed its own sales network,
an incentive system for dealers, and is moving into financing of car purchases. The marketing policies,
and directly related manufacturing policies, have been very successful to date. Increasing investment by
other automobile manufacturers is resulting in a decline in market share even while VWs sales are
increasing. (See the answer to question 3 below.)

2. What choices did Volkswagen have in market entry strategy, and did it make a wise decision?
Volkswagen originally entered the Chinese market through exporting, and its success made it confident
that it could sell enough cars in China to justify entering into assembly and eventually manufacturing
there. Government regulations required that it have a Chinese partner or partners. The first step in the
process of investing was to develop relationships with government officials at the national, regional, and
local levels. As the location for its first assembly plant, it chose Shanghai, the industrial and business
center of the country. Its first partner, under the control of the municipal government, had an excellent
industrial network for supplying parts. The Bank of China became a third partner (valuable in facilitating
payments, etc.), and a firm controlled by the national government became a fourth partner. Its second
joint venture was with a firm directly under the control of the central government.

Volkswagen has carried out policies of increasing the use of locally made parts, establishing joint
ventures, developing licensing agreements, and undertaking other forms of cooperation. It has
modernized its production lines and provided employee-training programs to improve quality and
productivity.

Its strategies have been very successful, providing stronger growth than enjoyed by other entrants into
the market.

3. Should Volkswagen make a strong effort to maintain market share?

Volkswagen cannot maintain market share. The market is growing rapidly, but the amount of FDI flowing in
to China from other European, American, and Japanese automobile manufacturers is growing even more
rapidly. Meeting overall market demand would require investments of an amount beyond the capacity of
VW. Oversupply is already emerging as a problem and prices are falling. Volkswagen needs to
concentrate on improving productivity and lowering prices to remain competitive, hopefully continuing to
increase sales (while market share will inevitably be eroded).

4. Could selling the super luxury Phantom in China be useful for Volkswagen even if it does not
make money there?

Having a super luxury car in the Volkswagen lineup should contribute to the companys image and
prestige. This may be helpful in getting increased sales across the whole line of VW-produced
automobiles.

5. What benefits can Volkswagen expect from its promotional activities?

Its promotional activities keep Volkswagens name in front of the public in the increasingly competitive
Chinese market. It also should give the company an even better image with the people and government.
8.4 Nouveau Cosmeceuticals
1. Evaluate Nouveau Cosmeceuticals use of licensing in entering the Eastern European market.

Their use of a licensing agreement can be evaluated in three ways: (1) the problems involved in using
another form of market entry; (2) the advantages of using licensing; and (3) the disadvantages of using
licensing. Aces lack of knowledge regarding international business, and the high costs that would be
incurred in setting up her own marketing network, argue against taking a more direct approach. The
licensing agreement can be expected to provide rapid international expansion with minimum cost and
effort. The dangers in using licensing are discussed in the answer to question 2 below.

2. Should the company have formed a more formal and complete strategic alliance agreement?
Why or why not?

The details of the agreement are not clear from the limited information provided. It does appear that the
Latvian company is licensed to sell Nouveau Cosmeceuticals only within Latvia, so this leaves Ace free to
pursue licensing agreements with distributors in other countries. However, this would require a level of
initiative and involvement that Ace has not shown so far. One potential problem is that the Latvian
distributor might at some point decide to make and sell its own line of Cosmeceuticals in competition with
or in place of Nouveau Cosmeceuticals. They might do this just in Lavia or in other countries as well.
They may have better contacts in other European countries than Ace. The formulas for the product are
apparently not protected, there is apparently no no competition agreement, and the Latvian company
might be able to manufacture the products more cheaply themselves. Thus, a more formal and complete
licensing agreement should have been made.

8.5 Sonya Madden

1. Evaluate Sonya Maddens decision to locate her business close to where she has her
products produced.

As the sole owner of the business, Ms Maddens personal preferences, as well as purely business
reasons, are important. From the business standpoint, the basic questions are (1) either locating close to
the market or close to the customers provides greater advantages and (2) where are conditions most
favorable for headquartering the business itself. Ms Madden prefers to be based in Hong Kong and the
city does appear to have advantages for her business operations. The design function could probably be
located anywhere, but Madden feels that proximity to the production source is important in getting what
she wants quickly and with personal oversight. The location in Hong Kong, properly noted, also probably
provides some cachet. Trips to the market, her customers and potential customers in the US (why not
Europe?) are less frequently required and fairly quick and easy from Hong Kong.

The planned openings of offices in New York and Los Angeles will add substantial costs that would have
to be covered by the potential benefits (and greater sales) of having representatives available locally,
that is, in US time zones.

8.6 Wah Shing Toys

1. Is this an alliance that cannot miss? Discuss.

The ecological problem of disposing of 500 million alkaline batteries per year is real. However, it is not
clear from the material presented in the case that (1) the technical problems in developing fuel cells for a
wide range of toys will be easily solved; (2) the costs involved will be such that a wide range of toys can
be produced economically; or even (3) what the specifics of the fuel cell car developed are. According to
the case material, the H-racer miniature car developed by Horizon Fuel Cell Technologies uses a
hydrogen fuel cell. Hydrogen fuel cells for full-size automobiles are still in the development stage with
some individually produced cars using them now on the road for testing. Problems with them are that they
require a source of pure hydrogen, either derived from a fossil fuel or from electrolysis of water (which
requires a lot of energy). The hydrogen must be held under a great deal of pressure to keep it in a liquid
state (at least in the amounts required to run a full-size automobile). Such a car is zero emissions as it
runs along the road as the hydrogen and air burn to produce only water vapor, once the hydrogen has
been obtained/produced. So it would seem that the H-racer would have to have a rechargeable container
for holding the hydrogen a container that would have to be refilled from time-to-time with hydrogen. But
the company is talking about fuel cell toys powered by the sun. Mr Wankewycz says in the case that The
product is basically a miniature version of a real zero emissions car that runs on power generated from
sun and water. For a reader to be able to evaluate what he is saying, it would be necessary for the reader
to find out how the sun and water part works. Could it be that the hydrogen is produced by using energy
from the sun to generate electricity to perform the electrolysis?

2. Would the venture be better if Wah Shing had acquired Horizon Fuel Cell Technologies or visa
versa? Why or why not?

It is probably better for both companies to be in a joint venture than for Wah Shing to have acquired
Horizon Fuel Cell Technologies (or visa versa). Wah Shing is a large-scale manufacturer most skilled at
applying well-developed technologies in producing advanced toys. Horizon seems to be more focused on
developing new technologies that can be applied. It is likely that the managerial skills and approaches
best suited to the primary activities/objectives of each company might lead to conflict if one company
owned the other.

TEST BANK

1 First-mover advantages may include:

(a) reaching customers before others
(b) establishing brand recognition
(c) finding distributors and retailers who do not already handle the same type of products/
services
(d) All of the above
(e) None of the above.

1. The strategic focus of companies that have nonexport foreign market-based operations tends to vary
among companies from various countries:
(a) US companies in the UK market tended to focus more on cost reduction.
(b) Japanese companies in the UK market tended to focus more on volume.
(c) US companies in the UK market tended to focus more on improved productivity.
(d) All of the above.
(e) None of the above.
2. International strategic alliances:
(a) refer to cooperative activities between companies from two or more countries.
(b) have become less common as increased competition has reduced trust among companies.
(c) are seldom used by large, strong companies.
(d) All of the above.
(e) None of the above.

3. A fundamental purpose of an international or global strategic alliance is to enhance the long-run

competitiveness of the strategic partners.
(a) True
(b) False

4. In the FordMazda collaboration discussed in how to succeed in a joint venture/strategic alliance,

(a) Ford provided expertise in manufacturing and product development.
(b) Mazda provided expertise in international marketing and finance.
(c) top management involvement, frequent meetings, and anticipation of cultural differences were
important in success.
(d) All of the above.
(e) None of the above.

5. Market entry modes that have the drawback of training potential competitors are:
(a) licensing.
(b) greenfield wholly owned manufacturing.
(c) contract manufacturing.
(d) only answers (a) and (c) are correct.
(e) only answers (b) and (c) are correct.

6. The exhibit discussing the approach used by Korean companies in the European market indicated
that:
(a) rapid growth in their market share to over 20% each inspired them to find even better ways to
continue their rapid expansion.
(b) Daewoo, Goldstar, and Samsung all used the same approach.
(c) a key to their approach is stressing the advantage they have because of the reputation they have
for high quality.
(d) All of the above.
(e) None of the above.
7. An advantage of mergers and acquisitions as a form of market entry is that there is no problem of
integrating management styles.
(a) True
(b) False

8. A foreign assembly operation differs from a typical manufacturing operation in that the former
primarily assembles imported parts.
(a) True
(b) False

9. The turnkey operation is a specialized form of management contract.

(a) True
(b) False

10. The selection of a local partner is perhaps the single most important activity involved in establishing a
joint venture.
(a) True
(b) False

11. Once the decision has been made to have a production presence in a foreign market, determining the
best mode of entry is easy.
(a) True
(b) False

ANSWERS TO TEST BANK QUESTIONS

1. (d) 2. (d) 3. (a) 4. (a) 5. (c) 6. (d) 7. (e) 8. (b) 9. (a) 10. (a)
11. (a) 12. (b)