BBA 6th Semester International Business Management (604) UNIT 3

Compiled by: Ankit Agarwal

Assistant professor

DS College, Aligarh

International Organizational Structures

International Organizational Structures: Type # 1.

Expo-documents against acceptance Department:
Exports are often looked after by a company‟s marketing or sales department in the initial stages
when the volume of exports sales is low. However, with increase in exports turnover, an
independent exports department is often setup and separated from domestic marketing, as shown
in Fig. 17.2.

Exports activities are controlled by a company‟s home-based office through a designated head of
export department, i.e. Vice President, Director, or Manager (Exports). The role of the HR
department is primarily confined to planning and recruiting staff for exports, training and
development, and compensation.

Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are carried
out by the exports or marketing department with or without consultation with the HR
department.

International Organizational Structures: Type # 2.

International division structure:

1
As the foreign operations of a company grow, businesses often realize the overseas growth
opportunities and an independent international division is created which handles all of a
company‟s international operations (Fig. 17.3). The head of international division, who directly
reports to the chief executive officer, coordinates and monitors all foreign activities.

The in-charge of subsidiaries reports to the head of the international division. Some parallel but
less formal reporting also takes place directly to various functional heads at the corporate
headquarters.

The corporate human resource department coordinates and implements staffing, expatriate
management, and training and development at the corporate level for international assignments.
Further, it also interacts with the HR divisions of individual subsidiaries.

The international structure ensures the attention of the top management towards developing a
holistic and unified approach to international operations. Such a structure facilitates cross-
product and cross-geographic co-ordination, and reduces resource duplication.

Although an international structure provides much greater autonomy in decision-making, it is

often used during the early stages of internationalization with relatively low ratio of foreign to
domestic sales, and limited foreign product and geographic diversity.

2
International Organizational Structures: Type # 3.:
Global Organizational Structures:
Rise in a company‟s overseas operations necessitates integration of its activities across the world
and building up a worldwide organizational structure.

While conceptualizing organizational structure, the internationalizing firm often has to

resolve the following conflicting issues:
i. Extent or type of control exerted by the parent company headquarters over subsidiaries

ii. Extent of autonomy in making key decisions to be provided by the parent company
headquarters to subsidiaries (centralization vs. decentralization)

It leads to re-organization and amalgamation of hitherto fragmented organizational interests into

a globally integrated organizational structure which may either be based on functional,
geographic, or product divisions. Depending upon the firm strategy and demands of the external
business environment, it may further be graduated to a global matrix or trans-national network
structure.

Global functional division structure:

It aims to focus the attention of key functions of a firm, as shown in Fig. 17.4, wherein each
functional department or division is responsible for its activities around the world. For instance,
the operations department controls and monitors all production and operational activities;
similarly, marketing, finance, and human resource divisions co-ordinate and control their
respective activities across the world.

3
Such an organizational structure takes advantage of the expertise of each functional division and
facilitates centralized control. MNEs with narrow and integrated product lines, such as
Caterpillar, usually adopt the functional organizational structure.

Such organizational structures were also adopted by automobile MNEs but have now been
replaced by geographic and product structures during recent years due to their global expansion.

The major advantages of global functional division structure include:

i. Greater emphasis on functional expertise

ii. Relatively lean managerial staff

iii. High level of centralized control

iv. Higher international orientation of all functional managers

The disadvantages of such divisional structure include:

i. Difficulty in cross-functional coordination

ii. Challenge in managing multiple product lines due to separation of operations and marketing in
different departments

iii. Since only the chief executive officer is responsible for profits, such a structure is favoured
only when centralized coordination and control of various activities is required.

Global product structure:

Under global product structure, the corporate product division, as depicted in Fig. 17.5, is given
worldwide responsibility for the product growth.

The heads of product divisions do receive internal functional support associated with the product
from all other divisions, such as operations, finance, marketing, and human resources. They also
enjoy considerable autonomy with authority to take important decisions and operate as profit
centres.

4
The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so as to meet

rapidly changing customer needs in diverse markets. It enables close coordination between the
technological and marketing aspects of various markets in view of the differences in product life
cycles in these markets, for instance, in case of consumer electronics, such as TV, music players,
etc.

However, creating exclusive product divisions tends to replicate various functional activities and
multiplicity of staff. Besides, little attention is paid to worldwide market demand and strategy.
Lack of cooperation among various product lines may also result into sales loss. Product
managers often pursue currently attractive markets neglecting those with better long-term
potential.

Global geographic structure:

Under the global geographic structure, a firm‟s global operations are organized on the basis of
geographic regions, as depicted in Fig. 17.6. It is generally used by companies with mature
businesses and narrow product lines. It allows the independent heads of various geographical
subsidiaries to focus on the local market requirements, monitor environmental changes, and
respond quickly and effectively.

5
The corporate headquarter is responsible for transferring excess resources from one country to
another, as and when required. The corporate human resource division also coordinates and
provides synergy to achieve company‟s overall strategic goals between various subsidiaries
based in different countries.

Such structure is effective when the product lines are not too diverse and resources can be
shared. Under such organizational structure, subsidiaries in each country are deeply embedded
with nationalistic biases that prohibit them from cooperating among each other.

Global matrix structure:

It is an integrated organizational structure, which super-imposes on each other more than one
dimension. The global matrix structure might consist of product divisions intersecting with
various geographical areas or functional divisions (Fig. 17.7). Unlike functional, geographical, or
product division structures, the matrix structure shares joint control over firm‟s various
functional activities.

6
Such an integrated organizational structure facilitates greater interaction and flow of information
throughout the organization. Since the matrix structure has an in-built concept of interaction
between intersecting perspectives, it tends to balance the MNE‟s prospective, taking cross-
functional aspects into consideration.

It facilitates ease of technology transfer to foreign operations and of new products to different
markets leading to higher economies of scale and better foreign sales performance. Matrix
structure is used successfully by a large number of MNEs, such as Royal Dutch/Shell, Dow
Chemical, etc.

In an effort to bring together divergent perspectives within the organization, the matrix structure
may also lead to conflicting situations. It inhibits a firm‟s ability to respond quickly to
environmental changes in case an effective conflict resolution mechanism is not in place.

Since the structure requires most managers to report to two or multiple bosses, Fayol‟s basic
principle of unity of command is violated and conflicting directives from multiple authorities
may compel employees to compromise with sub-optimal alternatives so as to avoid conflict
which may not be the most appropriate strategy for an organization as a whole.

7
Transnational network structure:
Such a globally integrated structure represents the ultimate form of an earth-spanning
organization, which eliminates the meaning of two or three matrix dimensions. It encompasses
elements of function, product, and geographic designs while relying upon a network arrangement
to link worldwide subsidiaries (Fig. 17.8).

This form of organization is not defined by its formal structure but by how its processes are
linked with each other, which may be characterized by an overall integrated system of various
inter-related sub-systems.

The trans-national network structure is designed around „nodes‟, which are the units responsible
for coordinating with product, functional and geographic aspects of an MNE. Thus, trans-
national network structures build-up multidimensional organizations which are fully networked.

The conceptual framework of a trans-national network structure primarily consists of

three components:
Disperse sub-units:

8
These are subsidiaries located anywhere in the world where they can benefit the organization
either to take advantage of low-factor costs or provide information on new technologies or
market trends

Specialized operations:
These are the activities carried out by sub-units focusing upon particular product lines, research
areas, and marketing areas design to tap specialized expertise or other resources in the
company‟s worldwide subsidiaries.

Inter-dependent relationships:
It is used to share information and resources throughout the dispersed and specialized
subsidiaries.

Organizational structure of N.V. Philips which operates in more than 50 countries with diverse
range of product lines provides a good illustration of a trans-national network structure.

International Organizational Structures: Type # 4.

Evolution of Global Organizational Structures:
Organizational structures often exhibit evolutionary patterns, as shown in Fig. 17.9, depending
upon their strategic globalization. The historical evolution of organizational patterns indicates
that in the early phase of internationalization, most firms separate their exports departments from
domestic marketing or have separate international divisions.

9
 Companies with emphasis on global business strategies move towards global product structures
whereas those with emphasis on location base strategies move towards global geographic
structures.

Subsequently, a large number of companies graduate to a matrix or trans-national network

structure due to dual demands of local adaptations pressures and globalization. In practice, most
companies hardly adopt either pure matrix or trans-national structures; rather they opt for hybrid
structures incorporating both.

Types of International Strategies

A firm that has operations in more than one country is known as a multinational
corporation (MNC). The largest MNCs are major players within the international arena.
Walmart‟s annual worldwide sales, for example, are larger than the dollar value of the entire
economies of Austria, Norway, and Saudi Arabia. Although Walmart tends to be viewed as an
American retailer, the firm earns 35% of its revenues outside the United States. Walmart owns
significant numbers of stores in Mexico, Central America, Brazil, Japan, the United Kingdom,
Canada, Chile, Botswana, and Argentina. Walmart also participates in joint ventures in China
and India. Even more modestly sized MNCs are still very powerful. If Kia were a country, its
current sales level of approximately $21 billion would place it in the top 100 among the more
than 180 nations in the world.

Multinationals such as Kia and Walmart must choose an international strategy to guide their
efforts in various countries. There are four main international strategies available:

1. International
2. Multi-domestic
3. Global
4. Transnational

(Figure 9.2). Each strategy involves a different approach to trying to be sensitive to (1) costs and
efficiencies on one hand and trying to be responsive to (2) variation in customer preferences and
market conditions across nations. Responding or not responding to these two pressures of cost
and local cultural conditions determines which of the four types of international strategies will be
pursued.

10
Figure 9.9: Four International Strategies

11
12
International Strategy

Firms pursuing an international strategy are neither concerned about costs nor adapting to the
local cultural conditions. They attempt to sell their products internationally with little to no
change. When Harley Davidson sells motorcycles abroad, they do not need to lower their prices
or adapt the bike to local motorcycle standards. People in other countries buy a Harley
particularly because it is different from the local motorcycles. Buyers want the American look
and the sound and power of a Harley, and will pay for that differentiation. Belgium chocolate
exporters do not lower their price when exporting to the American market to compete with
Hershey‟s, nor do they adapt their product to American tastes. They use an international strategy.
Starbucks and Rolex watches are other examples of firms pursuing the international strategy.

Multi-Domestic Strategy

A firm using a multi-domestic strategy does not focus on cost or efficiency but emphasizes
responsiveness to local requirements within each of its markets. Rather than trying to force all of
its American-made shows on viewers around the globe, Netflix customizes the programming that
is shown on its channels within dozens of countries, including New Zealand, Portugal, Pakistan,
and India. Similarly, food company H. J. Heinz adapts its products to match local preferences.
Because some Indians will not eat garlic and onion, for example, Heinz offers them a version of
its signature ketchup that does not include these two ingredients. Outback Steakhouse uses the
multi-domestic strategy in the multiple countries where it operates, adapting to local eating
preferences but not lowering prices significantly.

Figure 9.10:
Baked beans flavored with curry? This H. J. Heinz product is very popular in the United
Kingdom.

Global Strategy

A firm using a global strategy sacrifices responsiveness to local requirements within each of its
markets in favor of emphasizing lower costs and better efficiency. This strategy is the complete
opposite of a multi-domestic strategy. Some minor modifications to products and services may

13
be made in various markets, but a global strategy stresses the need to gain low costs and
economies of scale by offering essentially the same products or services in each market.

Microsoft, for example, offers the same software programs around the world but adjusts the
programs to match local languages. Similarly, consumer goods maker Procter & Gamble
attempts to gain efficiency by creating global brands whenever possible. Global strategies also
can be very effective for firms whose product or service is largely hidden from the customer‟s
view, such as silicon chip maker Intel. Lenovo also uses this strategy. For such firms, variance in
local preferences is not very important, but pricing is.

Transnational Strategy

A firm using a transnational strategy seeks a middle ground between a multi-domestic strategy
and a global strategy. Such a firm tries to balance the desire for lower costs and efficiency with
the need to adjust to local preferences within various countries. For example, large fast-food
chains such as McDonald‟s and Kentucky Fried Chicken (KFC) rely on the same brand names
and the same core menu items around the world. These firms make some concessions to local
tastes too. In France, for example, wine can be purchased at McDonald‟s. This approach makes
sense for McDonald‟s because wine is a central element of French diets. In Saudi Arabia,
McDonalds serves a McArabia Chicken sandwich, and its breakfast menu features no pork
products like ham, bacon, or sausage.

Mergers and Acquisitions

Mergers and acquisitions (M&A) - one of the most well-known methods of expanding your
company, either nationally or internationally.

Put simply, it‟s when one company combines with another. For more complexity, M&A is a
term that describes the consolidation of either companies or assets.

“A merger is the combination of two firms, which subsequently form a new legal entity under
the banner of one corporate name.”

Acquisition:

An acquisition is when one company purchases most or all of another company's shares to gain
control of that company. Purchasing more than 50% of a target firm's stock and other assets
allows the acquirer to make decisions about the newly acquired assets without the approval of
the company‟s other shareholders.

Why Make an Acquisition?

Companies acquire other companies for various reasons. They may seek economies of scale,
diversification, greater market share, increased synergy, cost reductions, or new niche offerings.
Other reasons for acquisitions include those listed below.

14
As a Way to Enter a Foreign Market
If a company wants to expand its operations to another country, buying an existing company in
that country could be the easiest way to enter a foreign market. The purchased business will
already have its own personnel, a brand name, and other intangible assets, which could help to
ensure that the acquiring company will start off in a new market with a solid base.

As a Growth Strategy
Perhaps a company met with physical or logistical constraints or depleted its resources. If a
company is encumbered in this way, then it's often sounder to acquire another firm than to
expand its own. Such a company might look for promising young companies to acquire and
incorporate into its revenue stream as a new way to profit.

To Reduce Excess Capacity and Decrease Competition

If there is too much competition or supply, companies may look to acquisitions to reduce excess
capacity, eliminate the competition, and focus on the most productive providers.

To Gain New Technology

Sometimes it can be more cost-efficient for a company to purchase another company that
already has implemented a new technology successfully than to spend the time and money to
develop the new technology itself.

The Main Difference between Mergers and Acquisitions

The primary difference between mergers and acquisitions is that a merger is the combining of
two organizations into an entirely new entity, while an acquisition is when a company absorbs
another, but no new organization is created.

For instance, if two companies agree to merge and create a new legal entity, that would be a
merger. On the other hand, if one company buys out another and absorbs it into itself without
changing its own identity, that would be an acquisition.

Benefits or advantages of mergers and acquisitions

1. Economies of Scale

Underpinning all of M&A activity is the promise of economies of scale. The benefits that will
come from becoming bigger:

 Increased access to capital,

 lower costs as a result of higher volume,
 better bargaining power with distributors, and more.

15
While buyers should always avoid the temptation to indulge in „empire building,‟ as a general
rule, bigger companies usually enjoy advantages that small companies do not.

2. Economies of Scope

Mergers and acquisitions bring economies of scope that aren‟t always possible through organic
growth. One only has to look at Facebook to see that this is the case.

Despite providing users with the ability to share photos and contact friends within its platform, it
still acquired Instagram and Whatsapp.

Economies of scope thus allow companies to tap into the demand of a much larger client base.

3. Synergies

Synergies are typically described as „one plus one equalling three‟: the value that comes from
two companies working together in tandem to make something far more powerful.

An example is provided by Disney acquiring Lucasfilm. Lucasfilm was already a huge cash
generator through the Star Wars franchise, but Disney can add theme park rides, toys and
merchandise to the customer offering.

4. Opportunistic Value Generation

Some of the best deals happen when a company isn't even actively pursuing an acquisition.

The hallmark of these acquisitions is that the purchase price is less than the fair market value of
the target company‟s net assets.

Often these companies will be in some financial distress, but a deal can be made to keep the
company afloat while the buyer benefits from adding immediate value as a direct consequence of
the transaction.

5. Increased Market Share

One of the more common motives for undertaking M&A is increased market share.

Historically, retail banks have looked at geographical footprint as being key to achieving market
share and as a result, there has always been a high level of industry consolidation in retail
banking (most countries have a group of “Big Four” retail banks.

A good example is provided by the Spanish retail bank Santander, which has made the
acquisition of smaller banks an active policy, allowing it to become one of the largest retail
banks in the world.

6. Higher Levels of Competition

16
The larger the company, in theory, the more competitive it becomes.

Again, this is essentially one of the benefits of economies of scale: being bigger allows you to
compete for more.

To take an example: there are currently dozens of upstart companies entering the plant-based
meat market, offering a range of vegetable-based „meats‟.

But when P&G or Nestle begin to focus on this market, many of the upstarts will fall away,
unable to compete with these behemoths.

7. Access to Talent

Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the
answer will invariably be a variant of „people that can code‟.

Why is this?

Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But
also because all of the best coders are working for large silicon valley technology companies.

The biggest always have access to the best talent. That‟s as true for every other industry as it is
for technology.

8. Diversification of Risk

This goes hand-in-hand with economies of scope: By having more revenue streams, it follows
that a company can spread risk across those revenue streams, rather than having it focus on just
one.

To return to the example of Facebook: Some analysts suggest that younger eyeballs are turning
away from the social media giant towards other forms of social media… Instagram and
Whatsapp among them.

When one revenue stream falls, an alternative stream of revenue may hold, or even pick up,
diversifying the acquiring company‟s risk in the process.

9. Faster Strategy Implementation

Mergers and Acquisitions may be the best way to make a long-term strategy to become a mid-
term strategy. Suppose a company wants to enter the Canadian market; it could build from the
ground up and hope that it reached the desirable scale in five to ten years.

Or it could a business, its client base, distribution, and brand value and benefit from them all
upon closing of the acquisition.

17
This also goes for areas like new product development and R&D, where an organic strategy can
rarely match the speed provided by M&A.

10. Tax Benefits

Acquisitions can sometimes bring tax benefits if the target company is in a strategic industry or a
country with a favorable tax regime.

The example of US pharmaceutical companies looking at smaller Irish companies and moving
their headquarters to Ireland to avail of its lower tax base is a case in point. This is referred to as
a „tax inversion‟ deal.

The most well-documented version was a proposed $160 billion merger between Pfizer and
Allergan in 2016, subsequently scuppered by US government intervention.

Types of mergers

1. Vertical Merger
2. Horizontal Merger
3. Conglomerate Merger
4. Market Extension Merger
5. Product Extension Merger

1. Vertical Merger

Vertical mergers are simple and common. It‟s done to combine two companies that provide
similar or common goods or services, in an effort to bring together different supply chain
functions that either organization might operate with.

The hope here is that the merger will create „synergies‟. Essentially, this means that the two
companies will run more efficiently as one with the bigger organization benefiting from the
increase in assets and supply chain operations.

In some cases, these will be two companies that aren‟t actually competitors - but their coming
together makes sense logistically. For example, a car manufacturer may merge with a parts
supplier so that their common processes can be done with closer proximity and visibility. The car
manufacturer gains better control over the price of parts and the parts supplier benefits from a
consistent stream of business.

At the end of the day, it‟s about creating something that‟s greater than the sum of its parts.

2. Horizontal Merger

18
Horizontal mergers are a little different. Where a vertical merger operates between two
companies that may not happen to be competitors, a horizontal merger will operate between two
or more companies that are competitors.

These organizations will work within the same space and usually offer the same goods or
service. These are more common in industries that have fewer businesses offering the same
product, as there‟s an increased amount of competition. A successful merger or acquisition
within this market has high potential gains.

For example, imagine McDonald‟s and Burger King were to combine. This would be a textbook
example of a horizontal merger - two companies that operate within the same space, the merger
of which would create an entity with a „supersized‟ market share.

Cornering more of the market and joining certain operations, like manufacturing, may work to
decrease overall operating costs. For smaller businesses, it‟s a fantastic way of opening up
markets within other countries that may not have been accessed yet.

3. Conglomerate Merger

Conglomerate mergers are unlike the first two we‟ve discussed. This is a merger or acquisition
that takes place between organizations that have totally unrelated business activities.

It might seem counterintuitive, but mergers like these are beneficial. A merger like this can
increase market share, diversify a service, asset and stock portfolio and also offer the opportunity
to cross-sell products.

There are two divisions of the conglomerate merger:

 Pure: This is where the organizations involved have no common products or services at all.
 Mixed: This is where the organizations involved may have a certain small number of
similar products.

A famous example of a successful conglomerate merger is when Disney acquired Pixar.

Ultimately, mergers like this can be about portfolio diversification. When one product or sector
is performing poorly, it‟s hoped that the others can compensate for any losses.

4. Market Extension Merger

Imagine you‟re an organization that operates in a specific market. Now, there‟s another
organization that offers the same product or service, but in a different market. You‟re looking for
a way into that market in an effort to increase your market share and client base. A market
extension merger is the way to go about this.

A great example comes from all the way back in 2002, when RBC Centura acquired Eagle
Bancshares Inc. Now, RBC Centura (RBC Bank) is a Canadian-owned venture that was looking

19
to grow its operations in North America. Acquiring Eagle Bancshares Inc was the best way to go
about this, as it allowed them to expand into the metropolitan Atlanta region.

At the time, this gave RBC Centura access to the skills and experience of an extra 283
employees, almost 90,000 accounts and up to $1.1 billion in assets.

5. Product Extension Merger

Product extension mergers are similar to market extension mergers. These involve two or more
companies that both deal in similar or related products and operate in the same market. For
example, also back in 2002, Broadcom acquired Mobilink Telecom Inc in order to combine the
handset product designs of the latter with the wireless, Bluetooth products of the former.

This is a classic example of a product extension merger, where the merging companies can group
their products together, in order to share expertise, technology and designs, as well as gain access
to a much bigger set of customers. In turn, this has the potential to lead to much higher profits.

At the end of the day, mergers and acquisitions bring two or more companies together. It‟s the
reasons for that and the methods of M&A that can differ. Overall, an M&A offers a potentially
lucrative, exciting and advantageous opportunity for expanding businesses - especially to those
that are expanding overseas.

Now, even though it‟s advantageous, there are risks involved, like any expansion opportunity.
These pitfalls can sometimes be subtle, so it‟s worth reading up on the potential issues that your
business might face if you‟re considering an M&A. To gain this insight, check out our guide.

Foreign Market Entry Strategies:-

When an organization has made a decision to enter an overseas market, there are a variety of
options open to it. These options vary with cost, risk and the degree of control which can be
exercised over them. The simplest form of entry strategy is exporting using either a direct or
indirect method such as an agent, in the case of the former, or countertrade, in the case of the
latter. More complex forms include truly global operations which may involve joint ventures, or
export processing zones. Having decided on the form of export strategy, decisions have to be
made on the specific channels. Many agricultural products of a raw or commodity nature use
agents, distributors or involve Government, whereas processed materials, whilst not excluding
these, rely more heavily on more sophisticated forms of access.
When a company makes the commitment to go international, it must choose an entry strategy.
This decision should reflect an analysis of market potential, company capabilities, and the degree
of marketing involvement and commitment management is prepared to make.
A company‟s approach to foreign marketing can require minimal investment and be limited to
infrequent exporting with little thought given to market development .Or a company can make
large investments of capital and management effort to capture and maintain a permanent, specific
share of world markets.

20
There is a variety of foreign market entry strategies from which to choose. Each has particular
advantages and shortcomings, depending on company strengths and weaknesses, the degree of
commitment the company is willing or able to make and market characteristics.

Foreign market entry modes differ in degree of risk they present, the control and commitment
of resources they require and the return on investment they promise.

The decision of how to enter a foreign market can have a significant impact on the results.
Expansion into foreign markets can be achieved via the following some mechanisms:-
 Exporting.
 Licensing.
 Joint Venture.
 Direct Investment.

Exporting:-
Exporting is the most traditional and well established form of operating in foreign markets.
Exporting can be defined as the marketing of goods produced in one country into another.
Exporting is the marketing and direct sale of domestically-produced goods in another country.
Exporting is a traditional and well-established method of reaching foreign markets. Since
exporting does not require that the goods be produced in the target country, no investment in
foreign production facilities is required. Most of the costs associated with exporting take the
form of marketing expenses. In this no direct manufacturing is required in an overseas country,
significant investments in marketing are required. The tendency may be not to obtain as much
detailed marketing information as compared to manufacturing in marketing country; however,
this does not negate the need for a detailed marketing strategy.

Exporting commonly requires coordination among four players:-

 Exporter.
 Importer.
 Transport provider.
 Government.

Types of Exporting:-
There are two types of exporting which are as follows:-
1. Direct exports:-
Direct exports represent the most basic mode of exporting made by a (holding) company,
capitalizing on economies of scale in production concentrated in the home country and affording
better control over distribution. Direct export works the best if the volumes are small. Large
volumes of export may trigger protectionism.

Types of Direct Exports:-

 Sales representatives: - Sales representatives represent foreign suppliers/manufacturers in
their local markets for an established commission on sales. Provide support services to a
manufacturer regarding local advertising, local sales presentations, customs clearance
formalities, legal requirements. Manufacturers of highly technical services or products such
as production machinery, benefit the most form sales representation.

21
 Importing distributors: - Importing distributors purchase product in their own right and
resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a
good market entry strategy for products that are carried in inventory, such as toys,
appliances, prepared food.

Merits:-
 Control over selection of foreign markets and choice of foreign representative companies.
 Good information feedback from target market.
 Better protection of trademarks, patents, goodwill, and other intangible property.
 Potentially greater sales than with indirect exporting.

Demerits:-
 Higher start-up costs and higher risks as opposed to indirect exporting.
 Greater information requirements.
 Longer time-to-market as opposed to indirect exporting.

2. Indirect exports:-
An indirect export is the process of exporting through domestically based export intermediaries.
The exporter has no control over its products in the foreign market.

Types of Indirect exports:-

 Export trading companies (ETCs):- These provide support services of the entire export
process for one or more suppliers. Attractive to suppliers that are not familiar with exporting
as ETCs usually perform all the necessary work: locate overseas trading partners, present the
product, quote on specific enquiries, etc.
 Export management companies (EMCs): - These are similar to ETCs in the way that they
usually export for producers. Unlike ETCs, they rarely take on export credit risks and carry
one type of product, not representing competing ones. Usually, EMCs trade on behalf of their
suppliers as their export departments.
 Export merchants: - Export merchants are wholesale companies that buy unpackaged
products from suppliers/manufacturers for resale overseas under their own brand names. The
advantage of export merchants is promotion. One of the disadvantages for using export
merchants result in presence of identical products under different brand names and pricing on
the market, meaning that export merchant‟s activities may hinder manufacturer‟s exporting
efforts.
 Confirming houses: - These are intermediate sellers that work for foreign buyers. They
receive the product requirements from their clients, negotiate purchases, make delivery, and
pay the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes
the product it may become a trade representative. A potential disadvantage includes
supplier‟s unawareness and lack of control over what a confirming house does with their
product.
 Nonconforming purchasing agents: - These are similar to confirming houses with the
exception that they do not pay the suppliers directly – payments take place between a
supplier/manufacturer and a foreign buyer.

Merits:-

22
 Fast market access
 Concentration of resources for production
 Little or no financial commitment. The export partner usually covers most expenses
associated with international sales
 Low risk exists for those companies who consider their domestic market to be more
important and for those companies that are still developing their R&D, marketing, and sales
strategies.
 The management team is not distracted
 No direct handle of export processes.

Demerits:-
 Higher risk than with direct exporting
 Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting
 Inability to learn how to operate overseas
 Wrong choice of market and distributor may lead to inadequate market feedback affecting
the international success of the company
 Potentially lower sales as compared to direct exporting, due to wrong choice of market and
distributors by export partners.
 Those companies that seriously consider international markets as a crucial part of their
success would likely consider direct exporting as the market entry tool. Indirect exporting is
preferred by companies who would want to avoid financial risk as a threat to their other
goals.

Licensing:-
Licensing essentially permits a company in the target country to use the property of the licensor.
Such property usually is intangible, such as trademarks, patents, and production techniques. The
licensee pays a fee in exchange for the rights to use the intangible property and possibly for
technical assistance.
Because little investment on the part of the licensor is required, licensing has the potential to
provide a very large ROI. However, because the licensee produces and markets the product,
potential returns from manufacturing and marketing activities may be lost.

According to Root, “Licensing can be defined as a contractual arrangement whereby one

company (Licensor) makes an asset available to another company (Licensee) in exchange for
royalties, License fees or some other form of compensation.”

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".

An international licensing agreement allows foreign firms, either exclusively or non-exclusively

to manufacture a proprietor‟s product for a fixed term in a specific market.
Summarizing, in this foreign market entry mode, a licensor in the home country makes limited
rights or resources available to the licensee in the host country. The rights or resources may
include patents, trademarks, managerial skills, technology, and others that can make it possible

23
for the licensee to manufacture and sell in the host country a similar product to the one the
licensor has already been producing and selling in the home country without requiring the
licensor to open a new operation overseas. The licensor earnings usually take forms of one time
payments, technical fees and royalty payments usually calculated as a percentage of sales.
As in this mode of entry the transference of knowledge between the parental company and the
licensee is strongly present, the decision of making an international license agreement depend on
the respect the host government show for intellectual property and on the ability of the licensor
to choose the right partners and avoid them to compete in each other market. Licensing is a
relatively flexible work agreement that can be customized to fit the needs and interests of both,
licensor and licensee.

Merits:-
Following are the main advantages and reasons to use an international licensing for expanding
internationally:-
 Obtain extra income for technical know-how and services.
 Reach new markets not accessible by export from existing facilities.
 Quickly expand without much risk and large capital investment.
 Pave the way for future investments in the market.
 Retain established markets closed by trade restrictions.
 Political risk is minimized as the licensee is usually 100% locally owned.
 Is highly attractive for companies that are new in international business.
Demerits:-
International licensing is a foreign market entry mode that presents some disadvantages and
reasons why companies should not use it as:-
 Lower income than in other entry modes
 Loss of control of the licensee manufacture and marketing operations and practices dealing to
loss of quality
 Risk of having the trademark and reputation ruined by an incompetent partner
 The foreign partner can also become a competitor by selling its production in places where
the parental company is already in.

Franchising:-
The Franchising system can be defined as, “A system in which semi-independent business
owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the
right to become identified with its trademark, to sell its products or services, and often to use its
business format and system.”
Compared to licensing, franchising agreements tends to be longer and the franchisor offers a
broader package of rights and resources which usually includes: equipment, managerial systems,
operation manual, initial trainings, site approval and all the support necessary for the franchisee
to run its business in the same way it is done by the franchisor. In addition to that, while a
licensing agreement involves things such as intellectual property, trade secrets and others while
in franchising it is limited to trademarks and operating know-how of the business.
The key success for franchising is to avoid sharing the strategic activity with any franchisee
especially if that activity is considered importance to the company. Sharing those strategic

24
activities may increase the potential of the franchisee to be our future competitor due to the
knowledge and strategic spill over.

Advantages:-
Advantages of the international franchising mode:-
 Low political risk.
 Low cost.
 Allows simultaneous expansion into different regions of the world.
 Well selected partners bring financial investment as well as managerial capabilities to the
operation.

Disadvantages: -
Disadvantages of the international franchising mode:-
 Franchisees may turn into future competitors.
 Demand of franchisees may be scarce when starting to franchise a company, which can lead
to making agreements with the wrong candidates.
 A wrong franchisee may ruin the company‟s name and reputation in the market.
 Comparing to other modes such as exporting and even licensing, international franchising
requires a greater financial investment to attract prospects and support and manage
franchisees.

Joint Venture:-
A joint venture is defined as a commercial collaboration between two or more unrelated parties
whereby they pool, exchange or integrate certain of their respective resources. They are usually
formed to undertake a specific project that has to be completed within a set period.

Joint Ventures can be defined as "an enterprise in which two or more investors share
ownership and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or licensing. In
Zimbabwe, an Olivine industry has a joint venture agreement with HJ Heinz in food processing.

According to Terpstra, “A joint venture is a foreign operation in which the international

company has enough equity to have a voice in management but not enough to completely
dominate or control the venture.”

Objectives of Joint Venture:-

There are five common objectives of a joint venture that are as follows:-
1. Easy Market Entry.
2. Risk / Reward Sharing.
3. Technology Sharing.
4. Joint Product Development, and
5. Conforming to government regulations.

Other benefits include political connections and distribution channel access that may depend on
relationships. Such alliances often are favourable when:-
 The partners' strategic goals converge while their competitive goals diverge.

25
 The partners' size, market power, and resources are small compared to the Industry leaders.
 Partners are able to learn from one another while limiting access to their own proprietary
skills.
 The key issues to consider in a joint venture are ownership, control, length of agreement,
pricing, technology transfer, local firm capabilities and resources, and government intentions.

Types / Kinds of Joint Venture:-

Joint venture is a very common strategy of entering the foreign market. In the widest sense, any
form of association which implies collaboration for more than a transitory period is a joint
venture (pure trading operations are not included in this concept).
There are different types of joint ventures. These are as follows:-

 Joint ventures by adoption : - Acquisition of part of the equity in a foreign

entrepreneurial company, whereby the foreign company becomes adopted unit of the joint
venture along with the promoter.
 Joint ventures by rebirth: - When the foreign partner transfers technology to an ailing
domestic business and takes equity stake in the revived business.

 Joint ventures by procreation: - A truly new venture is born out of a marriage

between the technical and/or market-know how of the partners.

 Joint ventures through family ties: - This occurs when suppliers join together with each
other or when a manufacturer takes an equity position in a supplier business. Joint ventures
are good as these involve strengths of the partners mingled and magnified and synergies
emanate. Joint ventures lead to synergies driven through core-competencies. There are
technical, financial, production, marketing and managerial synergies to drive from joint
ventures.

Merits:-
Joint ventures give the following advantages: -
 Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner
with know-how in technology or process.
 Joint financial strength.
 May be only means of entry and
 May be the source of supply for a third country.

Demerits:-
They also have disadvantages:-
 Partners do not have full control of management.
 May be impossible to recover capital if need be.
 Disagreement on third party markets to serve and Partners may have different views on
expected benefits.
 If the partners carefully map out in advance what they expect to achieve and how, then many
problems can be overcome.

26
 Free Trade Zones (FTZ):-
Many countries designate certain areas within their borders as a free trade zone. Free trade zones
help to minimize international trade barriers, enabling importers and exporters to operate under
better economic conditions. However, many importers and exporters are unfamiliar with free
trade zones and uncertain how to take advantage of them.
A free trade zone is a designated area that eliminates traditional trade barriers, such as tariffs, and
minimizes bureaucratic regulations. The goal of a free trade zone is to enhance global market
presence by attracting new business and foreign investments.
Free Trade Zone, popularly known as FTZ, is an area where goods may be traded without any
barriers imposed by customs authorities like quotas and tariffs. Free Trade Zone (FTZ) is a
special designated area within a country where normal trade barriers like quotas, tariffs are
removed and the bureaucratic necessities are narrowed in order to attract new business and
foreign investments.
Free trade zones are developed in places that are geographically advantageous for trade. Places
near international airports, seaports, and the like are preferred for developing free trade zones

Where is Free Trade Zones Located?

Free trade zones are generally located near a country‟s ports of entry. For convenience purposes,
locations with a close proximity to seaports and airports are commonly designated free trade
zones. In some cases, free trade zone are designated outside these areas to accommodate a
specific industry or trade purpose.
For example, in the United States, foreign trade subzones are designated as single-purpose sites
for businesses such as oil refineries or large manufactures because they could not feasibly be
moved to a traditional location.

What types of business use free trade zones?

Free trade zones are utilized by everyone from large manufactures to small businesses to
individuals. Any person or entity that intends to import or export goods and can consider taking
advantage of free trade zones.

Benefits to Trading in a Free Trade Zone:-

Operating within a country‟s free trade zones offers many benefits to importers and exporters.
Common economic benefits include the deferral or elimination of customs duties, exemption
from certain taxes, and inverted tariff relief. Free trade zones also offer operational benefits such
as indefinite storage opportunities, increased security and insurance on goods, and top-of-the-line
operating facilities.

27

Protect pdf from copying with Online-PDF-No-Copy.com