[Solution] Part 2, Step II: Organizational Environment
Created at:
Author: Sarah Bennett
Ways to Enter Markets in Other Countries
Organizations increase their international presence through a variety of strategies:
- An organization engages in importing when it acquires a good, a service, or capital abroad and brings it into the home country. Exporting means making the product or service in the home country and selling it abroad.
- With licensing, one organization allows another to use its brand name, trademark, technology, patent, copyright, or other assets according to strict specification in exchange for a royalty.
- In a strategic alliance, organizations cooperate for mutual gain through a partnership or other contractual agreement. Strategic alliances may exist between organizations offering different services to the same customers or between suppliers and buyers. In a joint venture, the allies are co-owners of a new enterprise.
- Direct investment involves building or buying manufacturing capability in another country. An example is the purchase of maquiladoras in Mexico by non-Mexican companies to manufacture goods where labor costs are low.
Advantages and Disadvantages of Different Approaches to Entering International Markets
Each approach to international market entry offers unique benefits and challenges:
Advantages of Different Approaches
| Approach | Advantage |
|---|---|
| Importing/Exporting | Low risk |
| Licensing | Greater profits |
| Strategic Alliances | Fast entry to market |
| Direct Investment | Control over the enterprise |
Disadvantages of Different Approaches
| Approach | Disadvantage |
|---|---|
| Importing/Exporting | Tariffs |
| Licensing | Lack of flexibility over time |
| Strategic Alliances | Smaller share of profits |
| Direct Investment | Greater risk |
Select the correct response to the following question about how managers choose to enter markets in other countries.
If a manager decides to purchase a factory in another country to make a product for sale there, which approach is the manager using?
- Direct investment
- Joint venture
- Royalties
- Exporting
View Explanation
Purchasing a business in another country is the direct investment approach to entering that market.
The table lists advantages of various approaches to entering international markets. Indicate which approach each advantage belongs to.
Greater profits
Fast entry to market
Low risk
Control over the enterprise
View Explanation
Licensing sets up another firm to make and/or sell the product in the other country. The original company earns royalties for as long as the licensing agreement is in effect without needing to make the product, meaning that it can earn high profits over a long period.
In a strategic alliance, two or more companies agree to use each other's strengths for mutual advantage. For example, one company might provide capital while the company in the target country provides a distribution network. By bringing their different strengths to bear, the companies can enter the market more quickly and access more resources than either could alone.
Importing and exporting are low-cost, low-risk ways to buy or sell in international markets. This is often the approach used by small companies because it lacks the potential complications and complexity of other approaches.
Through direct investment, a company purchases a manufacturing facility or other business in the target country. Because the company owns the assets, it has complete control over them, and it immediately gains a fully operational business.
The table lists disadvantages of various approaches to entering international markets. Indicate which approach each disadvantage belongs to.
Smaller share of profits
Greater risk
Lack of flexibility over time
Tariffs
View Explanation
Because a strategic alliance involves an agreement between two companies to enter the market together, each company has only limited control over the business and only a partial share of the profits; the companies need to share control and profits with each other.
Through direct investment, a company purchases a manufacturing facility or other business in the target country. Because the company is now operating in a foreign country, without a licensee or partner, the company assumes all the risk of that environment, and in some countries, this risk is quite high. Also, the organization needs to navigate all the complexity of operating in a different culture and under different laws.
Licensing sets up another firm to make and/or sell the product in the other country. The original company may still be locked into the agreement after environmental conditions have changed and the agreement is no longer beneficial. Also, the licensee may learn how to make the product/service and then become a competitor.
Importing and exporting goods can incur costs in the form of government-imposed tariffs (taxes) when the product crosses a national border. Also, because the goods travel to another country, transportation costs are higher than if the product was made in the place where it will be sold.
