Exam 13: Selecting and Managing Entry Modes

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When one company designs,constructs,and tests a production facility for a client,the agreement is called a turnkey (build-operate-transfer)project.The term turnkey project is derived from the understanding that the client,who normally pays a flat fee for the project,is expected to do nothing more than simply 'turn a key' to get the facility operating.The company awarded a turnkey project completely prepares the facility for its client.
Similar to management contracts,turnkey projects tend to be large-scale and often involve government agencies.But unlike management contracts,turnkey projects transfer special process technologies or production-facility designs to the client.They typically involve the construction of power plants,airports,seaports,telecommunication systems,and petrochemical facilities that are then turned over to the client.Under a management contract,the supplier of a service retains the asset-the managerial expertise.
With turnkey projects,one company hires another to complete a specified scope of work.Strategic alliances,on the other hand,involve a level of cooperation between companies that choose to partner to achieve joint objectives.
A relationship whereby two or more entities cooperate (but do not form a separate company)to achieve the strategic goals of each is called a strategic alliance.Similar to joint ventures,strategic alliances can be formed for relatively short periods or for many years,depending on the goals of the participants.Strategic alliances can be established between a company and its suppliers,its buyers,and even its competitors.In forming such alliances,sometimes each partner purchases a portion of the other's stock.In this way,each company has a direct stake in its partner's future performance.This decreases the likelihood that one partner will try to take advantage of the other.

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The choice of entry mode has many important strategic implications for a company's future operations.Because enormous investments in time and money can go into determining an entry mode,the choice must be made carefully.Several key factors that influence a company's international entry mode selection are the cultural environment,political and legal environments,market size,production and shipping costs,and international experience.
Cultural Environment-The dimensions of culture-values,beliefs,customs,languages,religions-can differ greatly from one nation to another.In such cases,managers can be less confident in their ability to manage operations in the host country.They can be concerned about the potential not only for communication problems but also for interpersonal difficulties.As a result,managers may avoid investment entry modes in favor of exporting or a contractual mode.On the other hand,cultural similarity encourages confidence and thus the likelihood of investment.Likewise,the importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market.
Political and Legal Environments-Political instability in a target market increases the risk exposure of investments.Significant political differences and levels of instability cause companies to avoid large investments and to favor entry modes that shelter assets.
A target market's legal system also influences the choice of entry mode.Certain import regulations,such as high tariffs or low quota limits,can encourage investment.A company that produces locally avoids tariffs that increase product cost; it also doesn't have to worry about making it into the market below the quota (if there is one).But low tariffs and high quota limits discourage market entry by means of investment.Also,governments may enact laws that ban certain types of investment outright.
Market Size-The size of a potential market also influences the choice of entry mode.For example,rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market.High domestic demand in China is attracting investment in joint ventures,strategic alliances,and wholly owned subsidiaries.On the other hand,if investors believe that a market is likely to remain relatively small,better options might include exporting or contractual entry.
Production and Shipping Costs-By helping to control total costs,low-cost production and shipping can give a company an advantage.Accordingly,setting up production in a market is desirable when the total cost of production there is lower than in the home market.Low-cost local production might also encourage contractual entry through licensing or franchising.If production costs are sufficiently low,the international production site might even begin supplying other markets,including the home country.An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market.Lower production costs at home make it more appealing to export to international markets.
Companies that produce goods with high shipping costs naturally prefer local production.Contractual and investment entry modes are viable options in this case.Alternatively,exporting is feasible when products have relatively lower shipping costs.Finally,because they are subject to less price competition,products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs.In this case,exporting is a likely selection.
International Experience-Most companies enter the international marketplace through exporting.As companies gain international experience,they tend to select entry modes that require deeper involvement.But this means businesses must accept greater risk in return for greater control over operations and strategy.Eventually,they may explore the advantages of licensing,franchising,management contracts,and turnkey projects.After businesses become comfortable in a particular market,joint ventures,strategic alliances,and wholly owned subsidiaries become viable options.