Foreign Operations Methods

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Russian: Международные операции: методы и формы


Introduction

An integrity of global supply chains across borders is accomplished with help of main international operations [1]understood also as modes of entry. An existing areas of international business evolve, or new areas emerge, the process tends to spill over into questions that pertain to the use of foreign operations modes [2] The class of managerial decisions concerning choosing and implementing international operations is often classified as strategy decisions or the global market entry strategies [3] [4]. However, supposing any strategic decision has to answer questions "What?", "Where?", and, sometimes, "When?" to sell (to deliver), we propose to classify (to term) the entry mode decisions answering the questions "How?" as operative decisions whereas all decisions concerning marketing mix adjustments are named as tactic decisions.

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An entry mode is understood in terms of international marketing as an approach to international expansion a company chooses based on desired control and on the risk it can afford. Nevertheless, in terms of international logistics, the entry mode should be defined as a means to connect and match arms of a global supply chain belonging to different national marketing environments [5]. The main task of international logistics efforts is to overcome integrity disruptions on the way of international supply chain generated by dissimilarities between different national marketing environments (Fig. 1.). For this purpose an international logistics manager has to create such a combination of method and form of international operation (Table 2) that could fit the nature ща the product under consideration and other marketing/logistics factors (accomplishing marketing eco-balance [6]).

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Any product movement across borders is to be arranged as an international sale-purchase transaction. This absolute rule is valid due to export/import customs formalities and government regulations presented as tariff and non-tariff barriers in international trading. Therefore, the first step of international logistics managers in any international (foreign) operations is to reveal and interpret the differences between national marketing environments of (as minimum) two countries ("home country" and "host country" on Fig. 1.). The second step consists of executing export/import customs clearance, home and host country export/import government regulations and contract terms and conditions.

An approach to construct the unified classification table for all known (simple but not compound) international operations is based on the fact that an initial and main category of marketing exists.As it is well-known this category is an exchange. In traditional export-import operations this exchange is presented by the sale-purchase transactions while the simplest form of the countertrading is presented by barter involving no exchange of currency. Transmutated forms of international operations (Table 2) are more sophisticated but again there is the marketing exchange in the very center of such forms. Besides, the subject of the transmutated forms is a composition of intangible (services), virtual (intellectual property), and tangible (goods) components of a complex product to be exchanged.


Contents

Table 1. Main entry Mode Factors

Entry Mode Factors Commentary
The size of the market While there is no easy rule, the method of entry is different for a market in which combined sales amount to €10,000,000 (U.S. $14,159,000 – MAY22, 2011 exchange rate) per year and a market that exhibits sales in billions of euros.
The growth of the market A stable market, growing at a moderate rate, will call for a different entry strategy than one in which there is a substantial potential for growth.
The potential market share of the exporter A market in which the exporter can become a major player will call for a different strategy than one in which the exporter has no chance to be much more than a niche player.
The type of product Products with technology and a need for after-sale service and parts will require a different entry strategy than a disposable consumer good.
The marketing strategy of the firm. Although self-evident, a firm whose strategy is to provide a top-of-the-line product will have a different entry strategy than a firm that has chosen to be the lowest cost provider.
The characteristics of the country considered The level of development, the infrastructure of the country, the business sophistication of potential trade partners, the overall climate under which business is conducted, the culture of the market, and the culture of customers should all be considered in the decision of an entry strategy.(See the Model of Entry Decision Making at the end of the Table 3. below)
The time horizon considered Products that have a short life cycle, or products that are likely to generate a lot of “me-too” competitors, demand a different entry strategy than products that are patent protected or are likely to have a long life cycle or engender a long line of complementary products.
The willingness of the firm (its relevant managers) to get involved. Firms that actively want to develop foreign markets should have a different entry strategy than firms that believe that their domestic market is their primary concern and consider foreign sales as “bothersome.”

Table 2. Unified classification (methods-forms-subjects) of international operations (See LEGEND under the bottom-line)

Forms of International Operations: Methods of International Operations:
Direct Cooperative:

Piggybacking Consortium

Own or

Intracorporative

Indirect:

Agency*)

Distributorship**) Consignment***)

Countertrading Institutionally-Competitive****) E-commerce
TRADITIONAL METHODS - "PRODUCT" GROUP:
Importing (Reimporting) 1, 2A, 5, 6 1, 2A, 4, 5, 6, 7
Importing (Reimporting) 1, 2A, 5, 6 Commodity Exchange:

1B, 1C

Auction: 1B, 1C

Tender: 1A, 1B, 3

Exporting (Reexporting) 1, 2A, 5, 6 1, 2A, 4, 5, 6, 7
Exporting (Reexporting) 1, 2A, 5, 6 Commodity Exchange:

1B, 1C

Auction: 1B, 1C

Tender: 1A, 1B, 3

TRANSMUTATED METHODS - "KNOW-HOW" GROUP:
Foreign Assembling[7] 1 1
International Licensing[8] 1A, 1B, 2A, 2B, 3, 4 1C 7
International Franchising[9] 1A, 1B, 1C, 2A, 2B, 3, 4 7
International Engineering[10] 3
Foreign Manufacturing[11] 1B, 2 1, 2
TRANSMUTATED METHODS - "FOREIGN DIRECT INVESTMENTS" GROUP:
International Contractual Joint Venture[12] 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6 7
International Equity (Incorporated) Joint Venture[13] 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6 7
Foreign Subsidiary[14] 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6
Foreign Branch[15] 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6
International Strategic Alliance[16] [17] 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6 7
TRANSMUTATED METHODS - "RENT" GROUP:
International Operating Leasing[18] [19] 1 1A, 2
International Financial Leasing[20] [21] [22] [23] 1 1A, 2
International Management Contract [24] [25] 1 1A, 2
LEGEND: *) International Agency means that an Agent and its Principal are residents of different countries; **) International Distributorship means that a Distributor (Dealer, Reseller, Merchant, Jobber, etc.)and its Principal (Supplier, Vendor, etc.) are residents of different countries; ***) International Consignment means that a Consignee and its Consignor are residents of different countries; ****) "Institutionally-competitive method of international operations" term has to display two facts: 1) there is a special institute (commodity exchange, auction, tender committee, etc.) involved into trade transactions; 2) item prices are quoted as a result of buyers' price offering competition.


Table 3. Entry modes: Advantages and Disadvantages. Reasons for Switching

Exporting
Advantages Disadvantages
  • Ability to realize location and experience curve economies
  • High transport costs
  • Trade barriers
  • Problems with local marketing agents
Reasons to switch the entry mode Socio-cultural Political-Law Economic
From PRODUCT Group to KNOW-HOW Group
  • Problems with local marketing agents
  • Trade barriers (tariff & non-tariff)
  • High transport costs
  • Long distance
Licensing
Advantages Disadvantages
  • Low development costs and risks
  • Lack of control over technology
  • Inability to realize location and experience curve economies
  • Inability to engage in global strategic coordination [26]
Franchising
Advantages Disadvantages
  • Low development costs and risks
  • Lack of control over technology
  • Inability to engage in global strategic coordination
Reasons to switch the entry mode Socio-cultural Political-Law Economic
From KNOW-HOW Group to FDI Sub-Group One: Overseas Assembling to Turnkey Contracts
  • Lack of recipient's technological culture
  • Intellectual property cloning/piracy in favor of third parties
  • Cultivating competitors
Overseas Assembling to Turnkey Contracts
Advantages Disadvantages
  • Ability to earn returns from process technology skills in countries where FDI is restricted
  • Creating efficient competitors
  • Lack of long-term market presence
International Alliancing: Joint ventures
Advantages Disadvantages
  • Access to local partner's knowledge
  • Sharing development costs and risks
  • Politically acceptable
  • Lack of control over technology
  • Inability to engage in global strategic coordination
  • Inability to realize location and experience economies
Reasons to switch the entry mode Socio-cultural Political-Law Economic
From FDI Sub-Group One: Overseas Assembling to Turnkey Contracts to FDI Sub-Group Two: Overseas Wholly Owned Subsidiaries
  • Cross-cultural disputes
  • Law disagreement
  • Lack of control over technology
Overseas Wholly Owned Subsidiaries
Advantages Disadvantages
  • Protection of technology
  • Ability to engage in global strategic coordination
  • Ability to realize location and experience economies
  • High costs and risks
Rest of problems Socio-cultural Political-Law Economic
with Overseas Wholly Owned Subsidiaries
  • Cross-cultural disputes
  • Local xenophobia
  • Hostile actions of government agencies
  • Local xenophobia
  • High costs and risks
EDM model.gif

References

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  2. Welch, L.S., Benito, G.R.G., Petersen, B.: Foreign Operation Methods: Analysis, Strategy, and Dynamics: Edward Elgar, London, 2007 - p.8
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