Overcoming the liability of foreignness PDF

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Overcoming the liability of foreignness 

Change is coming and the power is shifting from west to east. Asian markets are becoming huge and China and Japan are economic powerhouses.

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There’s an end of an era in terms of economic power. Growth isn’t just in the west and Asia is rapidly expanding – much faster then Europe.

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China is an economic player and they don’t just receive FDI they also provide it. Chinese firms have begun expanding and investing into other economies. Indian cab company OLA has recently invested into Exeter to challenge Uber.

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Technological innovation is often referred to as the Fourth industrial revolution. Fuelled by the convergence of mobile, social, cloud computing and demand for anywhere/anytime access.

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This has led to disruptions in almost every industry. Technology has led to ways to innovate in every industry. Black cabs  Uber Newspapers  websites.

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The technological revolution is just the start of a continuing process. This isn’t the end

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Disruption will become more pervasive – software will be at the heart of technological change.

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Disruption changes the nature of the companies we work for. New competitors who are very flexible, asset and people light. Increase in the number of platform businesses. Alibaba doesn’t make anything, Airbnb doesn’t own anything etc.

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Disruption impacts on the purpose and management of systems. Less tall and bureaucratic now more flat, more collaboration than command and control.

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More entrepreneurial-based capitalism than managerial capitalism. Born global organisations are more popular than ever – they are created from nothing and have the ability to disrupt entire sectors. Uber and the black cab strikes in London.

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Businesses must be prepared for this disruption.

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Be entrepreneurial and think in the future. Try to be the first ones to disrupt in order to be ahead of the game. Keep your skills and knowledge up to date. Embrace the disruption and don’t be left behind with the times. Companies such as Blockbuster have suffered due to Netflix when they too should have taken to streaming.

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Morgen’s take:

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There is huge possibilities with technology. People need to have the skills and vision in order to capitalise on the benefits of technology.

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Build partnerships and do things with people than to people.

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What is the liability of foreignness?

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When entering new markets there will be competition from existing brands. Consumers will trust local brands much more and it can be hard for people to be persuaded that your new and unknown brand is better.

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Marketing therefore plays a huge role in reaching out to consumers. Being in touch with them and giving them reason to switch and providing the trust is a key component to being successful abroad. However, choosing the correct mode on entry is also key to maximising the chance of success.

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Tetley was taken over by Tata in 2000 and the mode of entry here was acquisition of an existing firm. They didn’t opt to change the packaging as English people trust the Tetley brand and continue to buy it. Should it have been changed, even though the product was the same, could have impact on trust.

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Modes of entry:

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Exporting  there can be sporadic exporting which means there can be random, onetime exports based on customer enquiries. Adv: Low risk, direct to customers, no commitments. Disadv: lack of trust as neither party knows each other, as demand rises this can be a suboptimal method.

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Direct vs indirect exporting  indirect  the producer simply produces goods and exporting is handled by another firm, typically in the same country. They deal with the movement of goods and distribution of the products. Tend not to do the marketing too. This could mean falling behind with competitors? Adv: economies of scale in production meaning lower unit costs. No need for experience as the responsibility of dealing with clients lies with the other firm – element of trust involved here. Limited commitment and investment making it a low risk venture. Can gain knowledge of exporting so can be used as a stepping stone. Disadv: there can be problems with exporting agencies such as lack of trust and assumption they can export successfully. Lack of contact with consumers means limited means for feedback. Limited market insight means there potential to fall behind competitors and not meet demands.

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Direct  pro-actively undertake the responsibility to export. This includes pricing and finding distribution channels. Sort of a ‘half way house’. Not quite enough exports to warrant an international office but too much to be sporadically exporting. Adv: Can control customer relationships and respond to changing market conditions. Not need to rely on another firm to export and reduces size of supply chains. Disadv: Only a halfway house. There will be a point where you need to be in closer contact with the customers and will need people to be able to meet them.

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Things to consider when deciding exporting strategy: information flows  how much info do I need to do this? If you’re exporting things in a dynamic market such a clothes,

being in contact with customers and seeing their needs in important. Maybe indirect not the best idea? If you’re exporting a small component to a light switch then indirect could be better as it takes the stress away from you and you don’t need that contact with customers. 

What resources are needed? How much money would it take for me to start exporting myself. Infrastructure such as warehousing, websites and so on all needed if we want to begin exporting. If we can’t afford or don’t want to commit then indirect could be better.

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Low volume is better suited for sporadic or indirect. Larger volumes better suited for direct exporting then moving to setting up a small subsidiary.

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Does it fit the firms mission? Will internationalising help the organisation reach their goals?

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Contractual modes of entry: working with partners on a contractual basis overseas (effective when rule of law is strong such as the west, issues arise in Asia where contracts not viewed the same)

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Licensing  Written permission given by one firm to another to allow it to engage in an activity previously legally forbidden. This could essentially be giving a foreign company the rights to sell or produce your product.

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The seller has intellectual property rights such as technology, patents and so on. The value they receive from the licensee could be a lump sum, royalties or percentage of profits.

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Licenses can be exclusive meaning only one firm is given the rights to sell it can, meaning even the licensor is excluded (Kayne West exclusive on Tidal). Sole license means the licensor and licensee are able to sell it (Hera London with Selfridges). Nonexclusive means various firms are given the licence to sell the product (Make-up brands such as Chanel).

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There’s a cost to licensing: Protecting and enforcing a license can be expensive, finding and evaluating potential licensees, negotiation costs, opportunity costs of assigning market developing to another firm.

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Licence vs Franchise: Franchises are when most of the function pf the business is transferred to the foreign buyer. Much more control over the company that having a licence – there has to be consistency within the chain to make sure it is recognisable (McDonald’s, subway etc). franchises support their franchisees much more on a day to day basis.

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There can still be limited control in franchising. Little to no control over production as the owner is responsible for training and producing. This could lead to poor products coming out of a franchise.

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There can be big costs with trying to terminate contracts and franchises. This problem doesn’t occur when you set up subsidiaries.

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Investment modes: minority share joint venture, majority share joint venture, WOFE (wholly owned foreign enterprise).

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Two (or more) companies agree to create a separate legal entity to carry out a productive economic activity in which each party plays a role in decision making. Parent firms should have common and long term objectives. Profits and losses shared in proportion to contribution. Input does always have to be money. One firm may provide more of the money but the other firm could provide resources, land, local market knowledge.

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Success in joint ventures: shared goals by parent firms to ensure goal congruence, shared values, high levels of trust, cultural understanding ( v important ), managerial capacity which include the ability to give and take.

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Strategic issues: Speed of entry. How long will it take to get established. In a dynamic market you don’t want to it to take too long to establish as competitors could move ahead in the market.

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WOFE  set up from scratch (good if already known brand) or buy an existing firm (when the market knows this brand but not yours) . Make or Buy.

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Key variables: Time  how quickly do you need to establish? If quickly, may be easier to licence to another firm, or to buy an existing firm. Commercial and political risk involved? How much control do you want over the foreign enterprise? If you’re ok to let a degree of control go, franchising could be a good idea. Is there trade barriers between the countries? What’s the competition within the market?

Important topic for exam: think about what is right for that firm at that time – there not a recipe for success. Who why and where....