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Advantages and Disadvantages of Contract Manufacturing

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					                         international business, 5th edition
chapter 12
strategies for
analyzing and entering
foreign markets
              Chapter Objectives 1

       • Discuss how firms analyze foreign
         markets
       • Outline the process by which firms
         choose their mode of entry into a foreign
         market
       • Describe forms of exporting and the
         types of intermediaries available to assist
         firms in exporting their goods


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              Chapter Objectives 2

       • Identify the basic issues in international
         licensing and discuss the advantages
         and disadvantages of licensing
       • Identify the basic issues in international
         franchising and discuss the advantages
         and disadvantages of franchising




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             Chapter Objectives 3

       • Analyze contract manufacturing,
         management contracts, and turnkey
         projects as specialized entry modes for
         international business
       • Characterize the greenfield and
         acquisition forms of FDI




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           Foreign Market Analysis

       • Assess alternative markets
       • Evaluate the respective costs,
         benefits, and risks of entering each
       • Select those that hold the most
         potential for entry or expansion



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         Table 12.1 Factors in Assessing
           New Market Opportunities

       • Product-market         • Potential target
         dimensions               markets
       • Major product-market   • Relevant trends
         differences
                                • Explanation of
       • Structural               change
         characteristics of
                                • Success factors
         national market
                                • Strategic options
       • Competitor analysis



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       Map 12.1 A Tale of Two Chinas




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          Dole Food Company’s international
       operations are subject to a variety of costs,
                   benefits, and risks.




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  Figure12.1 Choosing a Mode of Entry


                                         Exporting
       Decision Factors:
       Ownership advantages           International
       Location advantages              Licensing
       Internalization advantages
       Other factors                  International
           Need for control            Franchising
           Resource availability
           Global strategy          Specialized Modes

                                      Foreign Direct
                                       Investment

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                         Exporting

        Advantages                Disadvantages
        • Relatively low          • Vulnerability to tariffs
          financial exposure        and NTBs
        • Permit gradual          • Logistical
          market entry              complexities
        • Acquire knowledge       • Potential conflicts
          about local market        with distributors
        • Avoid restrictions on
          foreign investment


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        Motivations for Exporting




        Proactive      Reactive




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           Forms of Exporting


                     Indirect
                    exporting


         Direct            Intracorporate
        exporting             transfers



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        Figure 12.2a Indirect Exporting




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        Figure 12.2b Direct Exporting




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        Figure 12.2c Intracorporate Transfers




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    Additional Considerations for Exporting


              Governmental policies


               Marketing concerns


             Logistical considerations


                Distribution issues



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        Types of Export Intermediaries


        Export management company

          Webb-Pomerene association

            International trading company

                   Other intermediaries


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        Export Management Company

        An export management company (EMC)
            is a firm that acts as its client's export
              department by managing the legal,
        financial, and logistical details of exporting,
            and providing advice about consumer
        needs and available distribution channels in
          the foreign markets the exporter wants to
                            penetrate.


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        Webb-Pomerene Association

        A Webb-Pomerene association is a
        group of U.S. firms that operate within
           the same industry and that are
          allowed by law to coordinate their
           export activities without fear of
             violating U.S. antitrust laws.



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          Five Largest Soga Soshas

        • Mitsubishi Corporation
        • Mitsui & Company
        • Marubeni
        • Sumitomo Group
        • Itochu Corporation


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        Other Intermediaries


           Manufacturers’ agents

        Manufacturers’ export agents

         Export and import brokers

             Freight forwarders



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                   Licensing

        Licensing is when a firm, called the
        licensor, leases the right to use its
         intellectual property—technology,
        work methods, patents, copyrights,
          brand names, or trademarks—to
        another firm, called the licensee, in
                   return for a fee.


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        Figure 12.3 The Licensing Process



        Licensor leases the            Licensee uses the
            rights to use             intellectual property
        intellectual property           to create products
                                $$$
        Earns new revenues              Pays a royalty
         with low investment              to licensor




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                   Basic Issues in
               International Licensing

        • Specifying the boundaries of the
          agreement
        • Determining compensation
        • Establishing rights, privileges, and
          constraints
        • Specifying the duration of the contract



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                        Licensing

        Advantages                Disadvantages
        • Low financial risks     • Limited market
        • Low-cost way to           opportunities/profits
          assess market           • Dependence on
          potential
                                    licensee
        • Avoid tariffs, NTBs,
          restrictions on foreign • Potential conflicts
          investment                with licensee
        • Licensee provides       • Possibility of creating
          knowledge of local        future competitor
          markets

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                   Franchising

         A franchising agreement allows an
             independent entrepreneur or
        organization, called the franchisee, to
        operate a business under the name of
          another, called the franchisor, in
                   return for a fee.



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                  Basic Issues in
             International Franchising

        • Does a differential advantage exist
          in domestic market?
        • Are these success factors
          transferable to foreign locations?
        • Has franchising been a successful
          domestic strategy?


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        Yum! Brands Franchise
           Opportunities




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                          Franchising

        Advantages                    Disadvantages
        • Low financial risks         • Limited market
                                        opportunities/profits
        • Low-cost way to assess
          market potential            • Dependence on
                                        franchisee
        • Avoid tariffs, NTBs,
          restrictions on foreign     • Potential conflicts with
          investment                    franchisee
        • Maintain more control       • Possibility of creating
          than with licensing           future competitor
        • Franchisee provides
          knowledge of local market


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        Specialized Entry Modes


               Contract
             manufacturing

              Management
                contract

                Turnkey
                 project

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             Contract Manufacturing

        Advantages                Disadvantages
        • Low financial risks     • Reduced control
                                    (may affect quality,
        • Minimize resources
                                    delivery schedules,
          devoted to
                                    etc.)
          manufacturing
                                  • Reduce learning
        • Focus firm’s
                                    potential
          resources on other
          elements of the value   • Potential public
          chain                     relations problems

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             Management Contracts

        Advantages                Disadvantages
        • Focus firm’s            • Potential returns
          resources on its area     limited by contract
          of contracts              expertise
        • Minimal financial       • May unintentionally
          exposure                  transfer proprietary
                                    knowledge and
                                    techniques to
                                    contractee


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                 Turnkey Projects

        Advantages            Disadvantages
        • Focus firm’s        • Financial risks
          resources on its      – Cost overruns
          area of expertise
                              • Construction risks
        • Avoid all long-
                                – Delays
          term operational
          risks                 – Problems with
                                  suppliers


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           Foreign Direct Investment

        Advantages                Disadvantages

        • High profit potential   • High financial and
                                    managerial
        • Maintain control over     investments
          operations              • Higher exposure to
                                    political risk
        • Acquire knowledge of
          local market         • Vulnerability to
                                 restrictions on foreign
        • Avoid tariffs and      investment
          NTBs                 • Greater managerial
                                 complexity

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           Foreign Direct Investment

        • Building new facilities (the
          greenfield strategy)
        • Buying existing assets in a foreign
          country (acquisition strategy)
        • Participating in a joint venture



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               Greenfield Strategy

        • Best site
        • Modern facilities
        • Economic development incentives
        • Clean slate




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