Chapter Three

International Business Entry

Strategies

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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, direct investment?

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 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
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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
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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

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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
& procedures

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  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.
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It may be through network with sales
representative, the company can transfer
them exclusive rights to sell in a particular
geographic region.
A distributor in a foreign country is a merchant
who purchases the product from the
manufacturer and sells them at profit.
Distributors usually carry stock inventory and
service the product, and in most cases
distributes deals with retailers rather than
end users.
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 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 negotiations and
transactions..

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• Future Plans : You are open to several options for improvement
and expansion
• will be able to establish a direct contact with a foreign partner,
• Target management and control of the sales become possible
• enable the producer to have a closer relationship with foreign
buyers and the marketplace.
• applicable to a wider range of goods and services.

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 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 wise to have a detailed plan regarding aspects such as
shipping, and delivery etc.
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• 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
• may be inappropriate for goods with a short work life and are
unlikely to be exported

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 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. 18
 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

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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, 

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 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
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 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
• Depending on the type of intermediary with which you
are dealing
• You can field-test your products for export potential.
• In some instances, your local intermediaries can field
technical questions and provide necessary support.

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 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. You feel out of the loop.
• 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,

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 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.
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• The assignment of a license often depends on
specific contractual terms. The most common terms are,
that a license is only applicable for a particular geographic
region, just for a certain period of time or merely for a
stage in the Value chain.
• Moreover, there are different types of fees within the
trademark and brand licensing.

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• 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.
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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 27
 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 28
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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
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 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 business in one country by entity
based in other country
• An investor reaps all of rewards and assumes all of
the risks
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 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 in different countries

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 Mode of direct investment
Some of the direct investment modes of the
international business are:
A. Wholly –owned subsidiary
• A wholly-owned subsidiary company 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
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 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.
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 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
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