Entering Target Markets

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Course code: IBU2LF004

Theme 1 - Methods of internationalization

Teacher: Päivi Käri-Zein

• A market entry strategy is the planned method of delivering goods or services to a new target market and distributing them there. ( Wikipedia )

Some of the most common market entry strategies are:

• directly exporting products
• indirect exporting using a middleman, and
• producing products in the target market. ( Wikipedia )

But also:

• Licensing
• Franchising
• Greenfield project
• Joint ventures
• Wholly owned subsidiaries
• Alliances
• Turnkey project ( Wikipedia )

• To export means shipping the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". In International Trade, "exports" refers to selling goods and services produced in the home country to other markets. ( Wikipedia )

• Global marketing is marketing on a worldwide scale reconciling or taking commercial advantage of global operational differences, similarities and opportunities in order to meet global objectives". ( Wikipedia )

Methods of internationalization - Lesson 1 - Export entry modes

Export modes - Indirect exporting vs. direct exporting

Q: What kind of intermediaries can help the company to export? How?

• Export Agents
• Export Management Companies
• Export Trading Companies
• Export Merchants
• Association with Another Exporter

Q: What is the main difference between agent and distributor?

• An agent is someone who acts on your behalf. Although an agent may arrange a sale, the sale contract will be between you and the customer. An agent may be either an employee or self-employed.
• A distributor is a customer of yours. The distributor then sells the product on to the distributor’s own customers.

Methods of internationalization - Lesson 2 - Requirements for internationalization

• Internationalization has been viewed as a process of increasing involvement of enterprises in international markets. ( Wikipedia )

Common types of intellectual property rights include

• patents
• copyright
• industrial design rights
• trademarks
• trade dress and
• in some jurisdictions trade secrets. ( Wikipedia )

Methods of internationalization - Lesson 3 - Licensing and franchising

• The verb license or grant license means to give permission. The noun license refers to that permission as well as to the document recording that permission. ( Wikipedia )

• Franchising is the practice of using another firm's successful business model. The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb.

For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. ( Wikipedia )

• Franchising can be described as co-operation between two legally and financially independent firms where one firm, the franchisee, pays the other firm, the franchisor, for the right to sell the franchisor’s product and/or right to use its trademarks and business format in a given location for a specific period of time. Franchising is an ongoing business relation-ship between the franchisee and the franchisor. ( Blair and Lafontaine (2011, 3-4) )

• How does the licensor make money? How does the licensee make money?

Methods of internationalization - Lesson 1 - Foreign direct investment

• Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. ( Wikipedia )

• A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors ( Wikipedia )

• A subsidiary, subsidiary company, daughter company, or sister company is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or (when as) a parent corporation, wholly controls the activities and policies of the daughter corporation.

... The controlling entity is called its parent company, parent, or holding company. ( Wikipedia )

• If shares == 100% wholly owned subsidiary
• If shares > 50% subsidiary
• If shares < 50% equity alliance

• In many disciplines a greenfield is a project that lacks any constraints imposed by prior work. The analogy is to that of construction on greenfield land where there is no need to work within the constrains of existing buildings or infrastructure. ( Wikipedia )

• A greenfield investment is the investment in a manufacturing, office, or other physical commerce-related structure or group of structures in an area where no previous facilities exist. ( Wikipedia )

• Mergers and acquisitions (abbreviated M&A) are both an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. Mergers and acquisitions activity can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value. ( Wikipedia )

From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner (in which case the target company still exists as an independent legal entity controlled by the acquirer). ( Wikipedia on distinction between merger and acquisition from w:mergers and acquisitions )

Acquisitions take many forms

• horizontal = the product lines and markets of the acquired and acquiring companies are similar
• vertical = the acquired firm becomes supplier or customer of the acquiring firm
• concentric = the acquired company has the same market but different technology, or the same technology but different markets
• conglomerate = the acquired company is in a different industry from that of the acquiring company ( Heini )

• A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.

There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. ( Wikipedia )

• Consolidation of an industry or sector occurs when widespread M&A activity concentrates the resources of many small companies into a few larger ones, such as occurred with the automotive industry between 1910 and 1940. ( Wikipedia on Mergers and acquisitions )

Theme 2 - Export and import practicalities

Teacher: Pertti Tilli

• International trade ( w:fi:kansainvälinen kauppa ) is the exchange of capital, goods, and services across international borders or territories. ( Wikipedia )

• Import / export

Export and import practicalities - Lesson 1 - Basics of import/export

• A letter of credit is a document issued by a financial institution, or a similar party, assuring payment to a seller of goods and/or services provided certain documents have been presented to the bank. ( Wikipedia )

One of the primary peculiarities of the documentary credit is that the payment obligation is independent from the underlying contract of sale or any other contract in the transaction. ( Wikipedia on documentary credit )

• A Bill of Lading is a document generated by a shipping line or its agent, giving details of a shipment of merchandise. Alongside this principal purpose, the bill of lading also certifies that the goods have been shipped aboard a vessel (and in some cases certifies the condition of the goods at the point of loading), assigns title to the goods, and requires the carrier to release the merchandise to the holder of the title or a named party at the destination port. ( Wikipedia )

The Bill of Lading is a document of title of,goods, transferable by endorsement and is a receipt from shipping company regarding the number of packages with a particular weight and markings and a contract for the transportation of same to a port of destination mentioned therein. ( Wikipedia introduction )

• A freight forwarder, forwarder, or forwarding agent, is a person or company that organizes shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer or final point of distribution. ( Wikipedia )

• A private carrier is a company that transports only their own goods. The carrier's primary business is not transportation. ( Wikipedia )

• A common carrier in common law countries (corresponding to a public carrier in civil law systems, usually called simply a carrier) is a person or company that transports goods or people for any person or company and that is responsible for any possible loss of the goods during transport. ( Wikipedia )

• A contract of sale is a legal contract an exchange of goods, services or property to be exchanged from seller (or vendor) to buyer (or purchaser) for an agreed upon value in money (or money equivalent) paid or the promise to pay same. ( Wikipedia )

• Multimodal transport (also known as combined transport) is the transportation of goods under a single contract, but performed with at least two different means of transport; the carrier is liable (in a legal sense) for the entire carriage, even though it is performed by several different modes of transport (by rail, sea and road, for example). ( Wikipedia )

Export and import practicalities - Lesson 2 - Good sales quotations and Incoterms

Recap from Business Negotiations and Contracts

• A sales quote allows a prospective buyer to see what costs would be involved for the work they would like to have done. ( Wikipedia )

A sales quote may also be known as offer and sometimes bid. ( jubo-jubo )

• The Incoterms (2010) rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions or procurement processes. ( Wikipedia )

Table of incoterms showing who picks up the cost in each incoterm ( Wikipedia )

Incoterms specify:

• Transfer of risk
• Transfer of obligations
• Division of costs ( Teacher )

Main financial risks in foreign trade:

• Customer risk ( unable or unwilling to pay )
• Country risk ( political risk )
• Foreign exchange ( currency ) risk
• Bank risk
• Interest rate risk

Export and import practicalities - Lesson 4 - Documents and payments in international business

• International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. ( Wikipedia )

• The International Bank Account Number (IBAN) is an internationally agreed means of identifying bank accounts across national borders with a reduced risk of transcription errors. ( Wikipedia )

Export and import practicalities - Documents in international trade

Exporter:

• Commercial invoice
• Packing list
• Insurance certificate
• Inspection certificate
• Bank draft
• Certificate of origin
• Bill of Lading

Both:

• sales contract or pro forma invoice and order

Importer:

• Purchase order
• Letter of Credit application
• Import declaration

(from teacher's slides)

Export and import practicalities - Methods of payment

• Open account
• Documentary credit -> redirects to L/C as it ensures the payment.
• Advance payment ( Teacher )
• Documentary collection

A documentary collection is a process, in which the seller instructs his bank to forward documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer. ( Wikipedia )

Documentary Collections facilitate import/export operations. They do not provide the same level of security as Letters of Credit, but, as a result, the costs are lower. ( Wikipedia )

Unlike the Letters of Credit, for a Documentary Collection the bank acts as a channel for the documents but does not issue any payment covenants (does not guarantee payment). The bank that has received a documentary collection may debit the buyer's account and make payment only if authorised by the buyer. ( Wikipedia )

Documentary collection is done with the Bill of lading ( jubo-jubo )

Export and import practicalities - Lesson 6 - Customs, risk management and currency questions

• Customs is an authority or agency in a country responsible for collecting customs duties and for controlling the flow of goods, including animals, transports, personal effects, and hazardous items, into and out of a country. ( Wikipedia )

• Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

Risks can come from

• uncertainty in financial markets,
• threats from project failures (at any phase in design, development, production, or sustainment life-cycles),
• legal liabilities,
• credit risk, accidents,
• natural causes and disasters as well as
• deliberate attack from an adversary, or
• events of uncertain or unpredictable root-cause.

Several risk management standards have been developed including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety. ( Wikipedia )

• Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company. ( Wikipedia )