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College Professor, Former Dean of the Business School and Business Administration Department Chair at Lewis University in Romeoville, Illinois. Passionate about incremental and exponential learning through Social Media. I am also a Travel Junkie and devoted Foodie!

International Entry Modes: Contractual and Investment Options

Business Model Concept

Business Model Concept (Photo credit: Alex Osterwalder)

the chart showing the business model of TVB (c...

the chart showing the business model of TVB (chinese) (Photo credit: Wikipedia)

English: A model that describes the competitiv...

English: A model that describes the competitive environment of a company’s business model. (Photo credit: Wikipedia)

Global delivery system business model

Global delivery system business model (Photo credit: Wikipedia)

A McDonalds location in Moncton (mountain road...

A McDonalds location in Moncton (mountain road). I took the picture and touched it up in Photoshop CS3 myself. (Photo credit: Wikipedia)

English: The author and director of marketing ...

English: The author and director of marketing gave me permission to use this picture on the wikipedia page. (Photo credit: Wikipedia)

There are many different types of international entry modes for a company to pursue. As companies gain international experience, they select entry modes that require deeper involvement and investment. They are willing to accept greater risk in return for greater control over operations and strategy. They seek out higher investment returns with deeper involvement.

Here’s a list of entry modes with advantages and disadvantages:

http://wp.me/p3hrYt-fn

Companies explore the advantages of licensing, franchising, management contracts, and turnkey projects. When they achieve success with these entry modes, they pursue  joint ventures, strategic alliances, and wholly owned subsidiaries.

 

Investment entry modes entail direct investment in plant and equipment. Contractual entry modes are better suited to intangible products. Since some products are intangible, companies can use a variety of contractual entry modes to market highly specialized assets and skills in international markets including: licensing, franchising and management contracts.

Here is my Pinterest Board for this lesson:

http://www.pinterest.com/socialmediaevie/international-market-entry-strategies/

A license may be granted by a “licensor” to a “licensee” to use licensed material like intellectual property or a patented invention. The license is valid for a stipulated length of time and sometimes involves a specific territory. Business practices such as franchising, technology transfer, copyrights, special formulas and designs, trademarks, brand names, publication and character merchandising entirely depend on the licensing of intellectual property. Licensors receive royalty payments based on a percentage of revenue generated by the property.

Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand names. Sometimes, “licensing involves granting companies the right to use process technologies inherent to production.” Cross licensing occurs when companies employ licensing agreements to swap intangible property; this saves R & D costs.

Some advantages associated with licensing include: financing international expansion and upgrading existing facilities. Some disadvantages include: a reduction in global consistency of the quality and marketing of a product. and sharing proprietary knowledge with potential future competitors.

Franchising is the “practice of leasing for a prescribed period of time the right to use a firm’s successful business model and brand.” The franchisor is the supplier and the franchisee is the operator who pays to use the intangible property and/or business model. Franchisers typically receive compensation as flat fees or royalty payments. US firms dominate the world of international franchising. Franchising is growing rapidly in the EU. “In Eastern Europe, expansion suffers from a lack of capital, high interest rates and taxes, bureaucracy, restrictive laws, and corruption.”

Franchising gives greater control over the sale of a product in a target market.          Although licensing is common in manufacturing industries; franchising is primarily used in the service sector. Licensing normally involves a one-time transfer of property, but franchising requires ongoing assistance from the franchiser.

Some advantages of franchising include: it is a low-cost, low-risk mode of entry into new markets, it allows for rapid geographic expansion and leverages the cultural knowledge and know-how of local managers. Some common disadvantages are: it is difficult to manage many geographically dispersed franchisees in several nations and the agreements tend to be inflexible.

World Intellectual Property Organization, Geneva

World Intellectual Property Organization, Geneva (Photo credit: Wikipedia)

A “Management Contract involves one company supplying another company with managerial expertise for a specific period of time. Operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.” The supplier of expertise is compensated with either a lump-sum payment or a fee based upon sales.

Management contracts go beyond just selling a business model; they involve actually doing the work. A management contract can involve a wide range of functions including: technical operation of a production facility, management of personnel, accounting, marketing services and training. Long term management contracts are common in the hotel industry. It is easy for Hilton, Hyatt or Westin to obtain economies of scale, a global reservation systems, brand recognition using this method.The Marriott International Corporation operates solely on management contracts.

Marriott International

Marriott International (Photo credit: Wikipedia)

Management contracts have been used to a wide extent in the airline industry when foreign government action restricts other entry methods. Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to foreign direct investmentmanagement skills. This entry option allows managers to exploit international opportunities without controlling physical assets.

Turnkey Projects involve “designing, constructing, and testing a production facility for a client. They usually involve the transfer of special process technologies or production-facility designs to a client (e.g., power plants, telecommunications, petrochemical facilities).”

“Investment entry modes entail the direct investment in plant and equipment in a country coupled with ongoing involvement in the local operation.”  A  Wholly Owned Subsidiary is a facility entirely owned and controlled by a single parent company. It can be established by purchasing an existing company or greenfield by forming a new company. High-tech products generally built new state-of-the-art facilities.

Greenfield investments are expensive and involve constructing new facilities, training employees, and launching production. Managers have complete control over day-to-day operations in the target market and can easily coordinate activities with headquarters

Joint ventures are less costly than greenfield endeavors; a separate company is jointly owned by two or more independent entities. They can take many forms: Forward Integration Joint Ventures involve joint investment in downstream business activities; Backward Integration Joint Venture Parties invest together in upstream business activities;  Multistage Joint Venture is when one partner integrates downstream, and the other, upstream.

Some advantages of joint ventures involve penetrating international markets that are otherwise off-limits and accessing another company’s international distribution network. The local government or government-controlled company can obtain a direct stake in venture’s success.

Strategic Alliances involve the cooperation of two or more entities. They can be established with suppliers, buyers, and competitors. Advantages include sharing the cost of international investment projects and tapping into competitors’ strengths. A suitable partner must have something valuable to offer. Managers must carefully evaluate the benefits of a potential international cooperative arrangement.

Entering a new market requires a large investment. Cultural issues can impact the entry decision. The company may avoid investment entry modes in favor of exporting or a contractual modes. Cultural similarity encourages direct investment.

Political instability in a target market increases the investment risk. Instability leads companies to avoid direct investment options in favor of entry modes that shelter assets.

Import restrictions and regulations such as high tariffs or low quota limits can encourage investment. Producing locally avoids tariffs that increase product costs.

The size of a potential market can influence entry mode decisions. Rising incomes encourage investment because the firm anticipates growing demand. “Growing demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries.

Low production and shipping costs encourage investment in certain markets. Low-cost local production might encourage contractual entry through licensing or franchising. Companies producing products with high shipping costs prefer local production; exporting is feasible when products have low shipping costs. Advances in technology and transportation allow small companies to undertake entry modes requiring more commitment to the local market.

International Entry Modes: Exporting and Countertrade MBA

English: Diagram of German gun exports 2007, s...

English: Diagram of German gun exports 2007, source German government www.bmwi.de Category:Weapons Category:Export Category:International trade (Photo credit: Wikipedia)

Export in India

Export in India (Photo credit: Wikipedia)

English: Chart of worldwide firearms exports i...

English: Chart of worldwide firearms exports in year 2006. Rifles, shotguns, revolvers, pistols, military firearms, legal and illicit trafficking. Source is Small Arms Survey Report 2009 Deutsch: Schusswaffenexporte weltweit im Jahr 2006. Aufgeteilt in Jagd-/Sportgewehre, Kurzwaffen, Kriegswaffen, sowie legaler und illegaler Handel. Daten vom Small Arms Survey Report 2009 (Photo credit: Wikipedia)

English: United States Balance of Trade, 1960–...

English: United States Balance of Trade, 1960–2009. Data Source: US Census Bureau Foreign Trade Division: http://www.census.gov/foreign-trade/statistics/historical/gands.txt Green dots: Positive trade balance Red dots: Negative trade balance (i.e., trade deficit) (Photo credit: Wikipedia)

English: Japan's balance of trade for the US (...

English: Japan’s balance of trade for the US (1979 – 2008) 日本語: 日本の対米国向け貿易収支の推移(1979年~2008年) (Photo credit: Wikipedia)

English: United States Balance of Trade, 1960–...

English: United States Balance of Trade, 1960–2009. Data Source: US Census Bureau Foreign Trade Division: http://www.census.gov/foreign-trade/statistics/historical/gands.txt Green dots: Positive trade balance Red dots: Negative trade balance (i.e., trade deficit) (Photo credit: Wikipedia)

English: Foreign direct investment incoming in...

English: Foreign direct investment incoming in Jordan (Photo credit: Wikipedia)

English: graph shows the leaders of Belarusian...

English: graph shows the leaders of Belarusian export-oriented programming market (market shares) (Photo credit: Wikipedia)

English: Chart comparing major apparel exporti...

English: Chart comparing major apparel exporting companies exports to United States. (Photo credit: Wikipedia)

English: EU and free trade agreements countries

English: EU and free trade agreements countries (Photo credit: Wikipedia)

European Union

European Union (Photo credit: Wikipedia)

A line chart showing the United States Balance...

A line chart showing the United States Balance of Trade, 1991 – 2005. Data Source: US Census Bureau Foreign Trade Division http://www.census.gov/foreign-trade/statistics/historical/gands.txt Line chart generated in a spreadsheet, then edited in GIMP. Data is US government data in the public domain. Chart is self-made and donated to the public domain. Chart created by Tom Cool (www.tomcool.us) (User:Tomcool) on 1 April 2006. (Photo credit: Wikipedia)

 

There are many important factors involved in selecting international entry modes for a multinational organization. Some of them will impact trade balances. Each entry mode is suited to  situational circumstances.

Some entry modes are more appropriate under certain environmental variables with specific advantages and disadvantages. The entry mode(s) should match a company’s international strategy.

Global strategy addresses the organization’s guide to globalization. It describes how the company will pursue a global presence in the world’s marketplace. Where should the organization build manufacturing facilities and other value chain activities to optimize the use of precious resources and build a global competitive advantage.

Graph of montly trade balance figures of the E...

Graph of montly trade balance figures of the Eurozone, in billions of euros, used in Handelsbalans, to be updated monthly, source: Eurostat (Photo credit: Wikipedia)

When companies pursue a global strategy, they prefer an entry modes that offers tight control over international activities. The pursuit of a multinational strategy involves more decentralized decision making.

“As a single economy, the EU is the largest trading partner of the US with $367.8 billion worth of EU goods going to the US and $268.6 billion of US goods going to the EU as of 2011, totaling approximately $636.4 billion in total trade.[3]

The designated entry mode will impact the balance of trade data as displayed in the following graphs:

Partners of the United States represent 73.9% of U.S. imports, and 71.7% of U.S. exports as of December 2011.[1]

These figures do not include services or foreign direct investment, The largest U.S. partners with their total trade (sum of imports and exports) in billions of US Dollars for calendar year 2012 are as follows: [2]

A flow map of the largest trade partners of the US

Country Exports Imports Total Trade Trade Balance
 Canada 292.9 324.2 616.7 -31.8
 China 110.6 425.6 536.2 -315
 Mexico 216.3 277.7 494 -61.4
 European Union 184.3 260.6 444.8 -76.3
 Japan 70 146.4 216.4 -76.4
 Germany 48.8 108.5 157.3 -59.7
 United Kingdom 54.8 54.9 109.8 -0.1
 South Korea 42.3 58.9 101.2 -16.6
 Brazil 43.7 32.1 75.8 11.6
 Saudi Arabia 13.8 55.7 73.8 -37.6
 France 30.8 41.6 72.4 -10.8
 Taiwan 24.4 38.9 63.2 -14.5
 Netherlands 40.7 22.3 63 18.4
 India 22.3 40.5 62.9 -18.2
 Venezuela 17.6 38.7 56.4 -21.1
 Italy 16 36.9 52.9 -20.9

This list does not include the European Union (EU), which includes five (Germany, UK, France, Netherlands and Italy) of the above states in a single economic entity.

English: United States Balance of Trade, 1980–...

English: United States Balance of Trade, 1980–2010. Data Source: US Census Bureau Foreign Trade Division: http://www.census.gov/foreign-trade/statistics/historical/gands.txt (Photo credit: Wikipedia)

The United States is also the primary export or import partner of several countries. The percentages on these tables are based on 2012 data as shown on the CIA World Factbook. Some countries are repeated from the previous table.

Exports[4]
Region Percentage
 Chad 81.9%
 Haiti 81.7%
 Mexico 78.0%
 Canada 74.5%
 Saint Kitts and Nevis 56.0%
 Nicaragua 55.6%
 Jamaica 48.0%
 El Salvador 47.3%
 Dominican Republic 47.0%
 Trinidad and Tobago 42.1%
 Guatemala 40.2%
 Venezuela 39.1%
 Costa Rica 38.9%
 Ecuador 37.3%
 Colombia 36.6%
 Honduras 34.5%
 Cambodia 32.6%
 Belize 31.8%
 Guyana 30.8%
 Israel 27.8%
 Suriname 25.7%
 Iraq 21.1%
 Sri Lanka 20.4%
 Panama 20.2%
 Bangladesh 18.7%
 Ireland 17.9%
 Vietnam 17.8%
 Nigeria 16.8%
 Jordan 16.6%
 Fiji 14.6%
 Saudi Arabia 14.2%
 Saint Lucia 13.9%
 Pakistan 13.6%
Imports[5]
Region Percentage
 Canada 50.6%
 Mexico 49.9%
 Costa Rica 49.8%
 Aruba 46.4%
 Honduras 44.3%
 Dominican Republic 43.3%
 Guatemala 38.0%
 Jamaica 36.1%
 El Salvador 35.4%
 Trinidad and Tobago 33.1%
 Saint Kitts and Nevis 31.7%
 Venezuela 31.7%
 Bahamas 30.1%
 Ecuador 28.4%
 Suriname 26.0%
 Peru 24.6%
 Colombia 24.2%
 Belize 23.6%
 Panama 23.6%
 Chile 22.9%
 Guyana 22.2%
 Nicaragua 19.0%
 Qatar 14.2%
 Israel 12.9%
 Kuwait 11.8%
 Philippines 11.5%
 Lebanon 11.2%

An international entry mode is “the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market.” Companies seek entry into a given marketplace for various reasons: manufacturing or sales, desired level of controlThis Is Not the Target Market  and market size.

 

The most common method of buying and selling goods internationally is exporting and importing. Exporting involves shipping the goods and services out of the port of a given country. The seller is an “exporter”; the buyer is the “importer”. Exporting and importing commercial quantities of goods normally requires the involvement of customs authorities. An export’s counterpart is an import.

List of countries by leading trade partners

List of countries by leading trade partners (Photo credit: Wikipedia)

Companies use countertrade when exporting and importing products when they are unable to use a specific country’s currency. Countertrade involves selling goods or services that are paid for with other goods or services.

Developing and emerging markets often rely on countertrade to import goods due to lack of hard currency. Some of the former communist countries in Eastern and Central Europe use countertrade as well as nations in Africa, Asia, and the Middle East.

There are many types of countertrade:

a.         Barter: Exchange of goods or services directly for other goods or services without the use of money.

b.         Counter-purchase: Sale of goods or services to a country by a company that promises to make a future purchase of a country’s product.

c.         Offset: Agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future.

d.         Switch trading: One company sells to another its obligation to make a purchase in a given country.

e.         Buyback: Export of industrial equipment in return for products produced by that equipment.

Problems may arise when the price of a product declines between the barter time and the selling time. Fluctuating prices generate the same type of risk as in currency markets. Managers can hedge this risk on commodity futures markets in the same way that they hedge against currency fluctuations in currency markets.

Companies pursue exporting opportunities for many reasons:

Seal of the Export-Import Bank of the United S...

Seal of the Export-Import Bank of the United States. (Photo credit: Wikipedia)

1.         Expand total sales when the domestic market is saturated.

2.         Diversify geographic sales to level receivables, payables and cash flow.

3.         Learn how to conduct business in other cultures; exporting is a low-cost, low-risk entry mode.

 

Companies should develop a detailed export strategy. They should identify a potential market and determine whether demand exists in a particular target market. They should conduct market research and match the needs of the market to their value proposition.

English: North Sea Oil Prices and Norway's Tra...

English: North Sea Oil Prices and Norway’s Trade Balance, 1975-2000 (Photo credit: Wikipedia)

As the companies expand activities, they will discover the need for an export department or division. Some companies use intermediaries to get their products into a new market abroad; other companies perform export activities in-house. They can pursue direct or indirect exporting where the company sells to intermediaries who resell to buyers in a target market. “The choice of intermediary depends on the ratio of international sales to total sales, available resources, and the growth rate of the target market.” Agents can represent one or more indirect exporters in a target market. They are compensated with commissions on sales. Some companies will hire a freight forwarder;  a specialist in export-related activities like customs clearing, tariff schedules, and shipping and insurance fees.

Export and Import Financing associated with International trade poses risks for both exporters and importers. Exporters risk not receiving payment after delivery. Importers risk that delivery might never occur once payment is made. There are different types of export and import financing methods:

1.         Advance Payment: the importer pays for merchandise before it is shipped. “It is used when two parties are unfamiliar with each other, the transaction is small, or the buyer has a poor credit rating.”

2.         Documentary Collection: the bank acts as an intermediary without accepting financial risk. It is generally used in ongoing business relationships between two parties. “A draft (bill of exchange) is a document ordering an importer to pay an exporter a specified sum of money at a specified time. A bill of lading is a contract between an exporter and a shipper that specifies merchandise destination and shipping costs.”

3.         Letter of Credit: the importer’s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document. This is generally used when an importer’s has a poor credit rating. “Banks issue letters of credit after an importer has deposited a sum equal to the value of the imported merchandise. The bank pays the exporter, but the deposit protects the bank if the importer fails to pay for the merchandise.”

There are different types of letters of credit:

  1. An irrevocable letter of credit allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer.
  2. A revocable letter of credit can be modified by the issuing bank without obtaining approval from either the exporter or the importer.
  3. A confirmed letter of credit is guaranteed by both the exporter’s bank in the country of export and the importer’s bank in the country of import.

 

 

 

Outsourcing

A supply chain involves information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.

In business, outsourcing involves the contracting out of a business process to another party and may involve business process outsourcing. Outsourcing sometimes involves transferring employees and assets from one firm to another.

Outsourcing includes both foreign and domestic contracting,[5] and sometimes includes offshoring (relocating a business function to another country).[6] Financial savings from lower international labor rates can provide a major motivation for outsourcing or offshoring.

The opposite of outsourcing, insourcing, entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration.

Outsourcing is a very important tool for reducing cost and improving quality.

Logistics is the management of the flow of things between the point of origin and the point of consumption in order to meet requirements of customers or corporations. The resources managed in logistics can include physical items, such

 

English: Supply Chain Network Example

English: Supply Chain Network Example (Photo credit: Wikipedia)

* Enterprise Business Relationships, including ORM

* Enterprise Business Relationships, including ORM (Photo credit: Wikipedia)

English: Supply Chain of Indian Automobile Ind...

English: Supply Chain of Indian Automobile Industry (Photo credit: Wikipedia)

Manufacturing of a vessel dished end

Manufacturing of a vessel dished end (Photo credit: Wikipedia)

The International Journal of Advanced Manufact...

The International Journal of Advanced Manufacturing Technology (Photo credit: Wikipedia)

English: Incheon Airport Logistics Center of P...

English: Incheon Airport Logistics Center of Pantos Logistics (Korean Logistics company) (Photo credit: Wikipedia)

English: Screenshot Logistics Designer

English: Screenshot Logistics Designer (Photo credit: Wikipedia)

Logistics versus Supply Chain

Logistics versus Supply Chain (Photo credit: Wikipedia)

The Amazon Kindle 2

Value Chain Analysis

English: Porter's Value Chain

“A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. The concept comes from business management and was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Value”.

Watch this Michael Porter video:

SWOT and TOWS Analysis Overview and Videos

The SWOT-landscape systematically deploys the ...

The SWOT-landscape systematically deploys the relationships between overall objective and underlying SWOT-factors and provides an interactive, query-able 3D landscape. (Photo credit: Wikipedia)

Swot analysis image

Swot analysis image (Photo credit: Wikipedia)

A SWOT analysis is a structured method used to evaluate the company’s strengths, weaknesses, opportunities and threats.

 

You can find a published SWOT Analysis for your company in the EBSCO Company Profile.

This process involves identifying the internal and external factors that are favorable and unfavorable. The degree to which the internal environment of the firm matches with the external environment is expressed by the concept of strategic fit.

  • Strengths: characteristics of the business or project that give it an advantage over competitors.
  • Weaknesses: characteristics that place the business or project at a disadvantage relative to others
  • Opportunities: elements in the external environment that the firm can exploit
  • Threats: elements in the external environment that could cause trouble for the business or project

The SWOT is a building block of your strategic direction.

1. After completing a SWOT analysis, you will engage in a matching and converting process using a TOWS Matrix. Matching strengths to opportunities to leverage competitive advantages.

2.  Develop conversion strategies to convert or mitigate weaknesses or threats by developing new markets, diversifying or developing new products. Generate a TOWS Matrix for your project using this format:

http://www.mindtools.com/pages/article/worksheets/TOWSAnalysisWorksheet.pdf

Watch this video:

http://youtu.be/mH1EljfXp-0

Another good video:

http://www.youtube.com/watch?v=S2GZOsemVNk&feature=share&list=LP5ApG5KGUmPs

Here’s an excellent resource:

http://globaledge.msu.edu/industries/food-and-beverage

When you have gathered all of your data, you can complete your Team SWOT Analysis and start your TOWS Matrix.

Use these templates:

1. This worksheet will help you visually organize information about the external environment:

http://www.mindtools.com/pages/article/worksheets/PESTAnalysisWorksheet.pdf

2. Bring this Mindtools Worksheet to class so you can fill out the template with your teammates.

After completing a SWOT analysis for homework, you will engage in a matching and converting process using a TOWS Matrix. Matching strengths to opportunities to leverage competitive advantages. Develop conversion strategies to convert or mitigate weaknesses or threats by finding new markets, diversifying or developing new products. Generate a TOWS Matrix for your project using this format:

http://www.mindtools.com/pages/article/worksheets/TOWSAnalysisWorksheet.pdf

3. Generate a Porter’s Model Worksheet:

http://www.mindtools.com/pages/article/worksheets/PortersFiveForcesWorksheet.pdf

Here’s a Rudyard Kipling Quote to think about:

“I keep six honest serving , they taught me all I knew. Their names were What, Why, When, How , Where and Who.”

Figure 10: SWOT-Analysis of the organic busine...
Figure 10: SWOT-Analysis of the organic business idea. Belongs to The Organic Business Guide. (Photo credit: Wikipedia)

Learn About Michael Porter’s 5 Forces Model using the EBSCO Library Database

English: Porter Generic Strategies

English: Porter Generic Strategies (Photo credit: Wikipedia)

Michael Porter's Diamond of Advantage

Michael Porter’s Diamond of Advantage (Photo credit: Wikipedia)

Illustration of Porters 5 Forces. Illustrates ...

Illustration of Porters 5 Forces. Illustrates article Porter 5 forces analysis (currently available in 11 languages). (Photo credit: Wikipedia)

Català: Michael Porter. Česky: Michael Porter....

Català: Michael Porter. Česky: Michael Porter. Dansk: Michael Porter. Deutsch: Michael Porter. Español: Michael Porter. Suomi: Michael Porter. Bahasa Indonesia: Michael Porter. Nederlands: Michael Porter. ‪Norsk (bokmål)‬: Michael Porter. Polski: Michael E. Porter. Português: Michael Porter. Српски / Srpski: Majkl Porter. Svenska: Michael Porter. Українська: Майкл Портер. 16 лютого 2009. (Photo credit: Wikipedia)

You will use the EBSCO Library Database for this exercise.

 

 

 

 

Watch these Porter’s Model Videos:

1.  Michael Porter Interview

https://www.youtube.com/watch?v=mYF2_FBCvXw

2. http://www.youtube.com/watch?v=DViVtgD0xwE Michael Porter “You Need a Strategy for your Organization”

Go to EBSCO and find the MarketLine Industry Report for “NEW CARS IN THE US”. Read the entire report.

Go to page 14 of 40 in this report and you will see the “Five Forces” Analysis of this industry

Now you are ready to Identify Porter’s Five-Forces Model Table

  1. Create a table with the five forces on the left and snip and insert the 5 forces diagrams into the right side of the table table using the graphics in this report and your snipping tool on your computer under “Accessories”.
  2. Now research your industry form you final project using the same process and find your industry’s 5 forces.
  3. Create a table for your project. You r will tweet these slides at the end of the semester an part of your oral presentationl.

Watch this Generic Strategy Mini Lecture:

http://www.youtube.com/watch?v=V14kuqYEsxE&feature=share&list=ULV14kuqYEsxE

Watch this video: http://www.youtube.com/watch?v=QPu4v_Ae0Vc&index=4&list=ULV14kuqYEsxE

4. Michael Porter Ties it all together at UNC Chapel Hill: “What is Strategy”

http://www.youtube.com/watch?v=KvYwKM5bY0s

5. How to make America more competitive; Michael Porter is interviewed by Charlie Rose

Five forces

Threat of new entrants

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents (which in business refers to the largest company in a certain industry, for instance, in telecommunications, the traditional phone company, typically called the “incumbent operator”), the abnormal profit rate will trend towards zero (perfect competition).

The following factors can have an effect on how much of a threat new entrants may pose:

  • The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
  • Government policy
  • Capital requirements
  • Absolute cost
  • Cost disadvantages independent of size
  • Economies of scale
  • Economies of product differences
  • Product differentiation
  • Brand equity
  • Switching costs or sunk costs
  • Expected retaliation
  • Access to distribution
  • Customer loyalty to established brands
  • Industry profitability (the more profitable the industry the more attractive it will be to new competitors)

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor’s similar product. Increased marketing for drinking tap water might “shrink the pie” for both Coke and Pepsi, whereas increased Pepsi advertising would likely “grow the pie” (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Coke’s expense. Another example is the substitute of traditional phone with a smart phone.

Potential factors:

  • Buyer propensity to substitute
  • Relative price performance of substitute
  • Buyer switching costs
  • Perceived level of product differentiation
  • Number of substitute products available in the market
  • Ease of substitution
  • Substandard product
  • Quality depreciation

Bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many alternatives.

Potential factors:

  • Buyer concentration to firm concentration ratio
  • Degree of dependency upon existing channels of distribution
  • Bargaining leverage, particularly in industries with high fixed costs
  • Buyer switching costs relative to firm switching costs
  • Buyer information availability
  • Force down prices
  • Availability of existing substitute products
  • Buyer price sensitivity
  • Differential advantage (uniqueness) of industry products
  • RFM (customer value) Analysis
  • The total amount of trading

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

Potential factors:

  • Supplier switching costs relative to firm switching costs
  • Degree of differentiation of inputs
  • Impact of inputs on cost or differentiation
  • Presence of substitute inputs
  • Strength of distribution channel
  • Supplier concentration to firm concentration ratio
  • Employee solidarity (e.g. labor unions)
  • Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Intensity of competitive rivalry

For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.

Potential factors:

The Wonderful World of Global Strategic Management

Statue of Ralph Waldo Emerson, full-length, se...

Statue of Ralph Waldo Emerson, full-length, seated, facing front (Photo credit: Wikipedia)

English: Engraving of American philosopher and...

English: Engraving of American philosopher and poet Ralph Waldo Emerson as seen in his later years. Scanned from Ralph Waldo Emerson by Oliver Wendell Holmes and Charles Dudley Warner. Published by Houghton Mifflin, 1885. (Photo credit: Wikipedia)

Strategic Aligment Cycle

Strategic Alignment Cycle (Photo credit: Wikipedia)

Strategic Management involves  the “Art of Winning.” If you want to win, you must embrace change with entrepreneurial passion to create a sustained competitive advantage. You are the master of your destiny! Your diligence will enhance your success in all of your future endeavors.

What is your end game? Ralph Waldo Emerson said “Commerce is a game of skill which many people play but which few play well.”

Watch these videos:

 

English: Ralph_Waldo_Emerson_1940_Issue-3c.jpg...

English: Ralph_Waldo_Emerson_1940_Issue-3c.jpg Category:Famous Americans Issues Category:Ralph Waldo Emerson (Photo credit: Wikipedia)

 

 

 

Look at my Pinterest Board for Strategic Management Concepts and infographics: http://www.pinterest.com/socialmediaevie/learn-about-strategic-management/

In my class, you will build an arsenal of Global Strategic Management skills that will help you win in life! You will optimize your personal value chain!

Components of the Value Chain http://www.pinterest.com/pin/237213105346949860/

 

The over-riding intent of topic is to help you become a more savvy participant in the game of commerce. This will prepare you for a successful management career. This is a big picture course; it cuts across the whole spectrum of business functions that you have studied in your previous coursework. You will synthesize what you have learned in prior classes to make fact-based decisions.

You must focus on the total enterprise: (1) the industry and the competitive environment (2) long run direction and strategy (3) resources and competitive capabilities and (4) prospects for success. You will seek strategic harmony; a blend of sound strategy formulation and effective strategy execution!

 

Marine Institute Ireland, Strategic_Planning_S...

Marine Institute Ireland, Strategic_Planning_Symbol (Photo credit: Wikipedia)

The skills that you build in class, will ultimately maximize the value of your personal and professional assets with a strategic plan that you will deploy.

Change Management

Change Management (Photo credit: larry_odebrecht)

First, you must analyze the Drivers of Change in the External Environment by conducting research using the following model:

Drivers of Change in the External Environment Mindmap: http://www.xmind.net/share/socialmediaevie/drivers-of-change-in-the-external-environment/ #xmind

Michael Porter’s Five-Forces: http://www.pinterest.com/pin/237213105346371411/

What is business level strategy? https://www.youtube.com/watch?v=V14kuqYEsxE&list=ULrJ2tmqRkiCM

Position yourself in the industry http://www.pinterest.com/pin/237213105346371408/

There are many topics that you need to master. Your Strategic Management Toolkit will be brimming with intellectual assets.

Here’s an overview of these Strategic Management Tools:

Strategy Toolkit Mindmap: http://www.xmind.net/share/socialmediaevie/strategy-tools-1/ #xmind

Using XMind for Mind Mapping

Using XMind for Mind Mapping (Photo credit: Wesley Fryer)

In order to win, you must maintain a positive digital reputation. You will build this with another toolkit. Here are the components of your Social Media toolkit:

Social MediaToolkit Mindmap: http://www.xmind.net/share/socialmediaevie/create-and-promote-a-wordpress-blog-1/ #xmind

Click on the “Follow me on Pinterest” You will find “Business Boards” that highlight some of the concepts that we cover in class: http://pinterest.com/socialmediaevie/

When you click on a pin, they generally take you to more in-depth information about the concept.

Here’s an outstanding Introduction to Strategy Video for you to watch:

http://youtu.be/rJ2tmqRkiCM

Conduct a SWOT Analysis http://www.pinterest.com/pin/237213105343137805/

Create a Boston Consulting Group Matrix:http://youtu.be/vNoI3yOE-os

Start with a Mission:

http://www.pinterest.com/socialmediaevie/mission/

Try this exercise:

“Vision-Craft-O-Meter[1]

Use this easy and humorous class-opener to craft a vision statement for any organization.  The point here is that its easy to come up with some blather of a vision statement, but it is meaningless if it not backed up by executives actions and widely shared and understood by all members the organization and its external stakeholders.

 

OUR VISION IS TO BE A:

A) growing; leading; worldclass; premier; benchmark; first-mover

ORGANIZATION THAT PROVIDES

B) dynamic; innovative; creative; breathtaking; cost-effective; diverse; high-quality

C) products; services; people; products and services; people and services

TO

D) thrill our shareholders; delight our customers; enrich our stakeholders’ lives

IN THE

E) hyper-competitive; emerging; growing; attractive; thriving

F) business-solutions; health-solutions; consumer-solutions; financial-solutions; environmental-solutions

MARKETPLACE.”

Set your objectives:

revenue

profit

productivity/efficiency

Market share

globalization

on-line presence/social media

favorable financial performance

manage debt appropriately

Enhance liquidity

more favorable brand image

maximize shareholder wealth

enhance customer satisfaction

behave in a socially responsible/ethical manner

Identify your strategies: Using the Ansoff Matrix

http://youtu.be/AORoMxgp428

http://www.pinterest.com/pin/237213105346371402/

http://www.pinterest.com/pin/237213105346371400/

Select your entry mode:

http://www.pinterest.com/pin/237213105346371423/

Establish an organizational structure:

Apple $156,508,000,000 comes from: Macs, iPod, iPhone, Music Related, Peripherals, Software and Services

http://www.pinterest.com/pin/237213105344405444/

Steve Jobs talks about how Apple is structured: http://youtu.be/f60dheI4ARg

Richard Rumelt talks about business strategy:

http://www.youtube.com/watch?v=43kZDnyDXOc&feature=share&list=PL4ED265C0A251C2EF&index=5

Hard Rock Cafe strategy: http://www.youtube.com/watch?v=ZvF_lH9NRqM&list=PL4ED265C0A251C2EF&feature=share&index=6

 


[1] Adapted from Stewart, T. 1996. A refreshing change: Vision statements that make sense.  Fortune, 134: 6: 195-197.

 

 

 

 

 

Dr. EveAnn Lovero teaches Strategic Management and International Business at Lewis University. She writes Travel Guides at www.vino-con-vista.com

It's a Wonderful World (1939 film)

It’s a Wonderful World (1939 film) (Photo credit: Wikipedia)

Create your Strategic Management Project Template for your Online Class

English: Figure 10: SWOT-Analysis of the organ...

English: Figure 10: SWOT-Analysis of the organic business idea. Belongs to The Organic Business Guide. (Photo credit: Wikipedia)

Swot analysis

Swot analysis (Photo credit: Wikipedia)

SWOT analysis diagram in English language. Fra...

SWOT analysis diagram in English language. Français : Matrice SWOT en anglais. (Photo credit: Wikipedia)

English: Diagram of DuPont analysis of return ...

English: Diagram of DuPont analysis of return on equity. ‪Norsk (bokmål)‬: Diagram over DuPont-analyse av kapitalrentabilitet. (Photo credit: Wikipedia)

1. Create Google Drive Doc using table of contents page.

GUIDELINES FOR WRITTEN CASE ANALYSIS

 

I.    DIAGNOSIS – Current situation: summary of factors which contribute to present status

  1. Mission
  2. Objectives
  3. Corporate Strategy
  4. Policies
    1.  Diversity
    2.  Ethical Standards/code of Conduct
    3.  Suppliers
    4.  HR

 

5. Strategic Managers and Board
1.  Sr. Level Executives
2.  Corporate governance
a.  Responsibilities
b.  Board Committees
c.  Director Compensation

 

6. Generic Industry Type:
1.  Fragmented, Maturing, Energizing, Declining
2.  Industry Economic Characteristics (p.53)

3. Generic Industry Type

Industry definition
Market size and growth rate
Key rivals & market share
Scope of competitive rivalry
Concentration vs. fragmentation
Number of buyers
Demand determinants
Degree of product differentiation
Product innovation
Key success factors
Supply/demand conditions
Analysis of stage in life cycle
Pace of technological change
Vertical integration
Economies of scale
Learning/experience curve effects
Barriers to entry
Regulation/deregulation
Globalization
Trends

 

 

 

 

 

 

 

 

 

 

 

 

7. Organization Structure:

  1. type—functional, divisional, matrix, SBU
  2. advantages and disadvantages discussed in class

 

8. Financial Analysis / Altman & DuPont
1.  Graphs
2.  Altman
3.  Tobin’s Q
4.  DuPont Analysis

5. Stock Analysis

Compare your performance over time using the “Max Graph” from Yahoo Finance,

 

9. SWOT Analysis (See Handout)

  1. Internal (strengths, weaknesses)
  2. External (Opportunities, Threats)

 

10. Market Share Data Graphs

 

 

II.                      FOCAL POINTS FOR ACTION: Identify problems & issues which need to be resolved.  Analyze your company’s 10K before performing this step.

  1. Short Range
  2. Long Range

 

 

 

 

 

 

 

 

 

Go to www.lewisu.edu click on Academic, then Library, then On-line Databases

Go to Databases and type in your Company’s name and Industry to find helpful information.

 

 

 

 

Undergrad Strategic Chapter 8: Implementing Strategies

Industrial market segmentation

Industrial market segmentation (Photo credit: Wikipedia)

English: perceptual map with clusters - pillows

English: perceptual map with clusters – pillows (Photo credit: Wikipedia)

English: analysis for strategic planning process

English: analysis for strategic planning process (Photo credit: Wikipedia)

The Posters are BACK!

The Posters are BACK! (Photo credit: kvanhorn)

Chapter 8 – Implementing Strategies:  Marketing, Finance/Acct., R&D, & MIS Issues

 

Overview

 

Chapter 8 explains how to implement strategies by effectively managing market segmentation, perceptual mapping/product positioning, financial forecasting, debt vs. equity to obtain capital, data analysis (mining), R&D, and MIS issues.

 

The Chapter 8 Learning Objectives as stated in the textbook are given below:

 

1.         Develop effective perceptual maps to position rival firms.

2.         Develop effective perceptual maps to identify market segments and demand voids.

3.         Determine the cash worth of any business.

4.         Explain market segmentation and product positioning as strategy-implementation tools. Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs and priorities, and then designing and implementing strategies to target them. Market segmentation strategies may be used to identify the target customers, and provide supporting data for positioning to achieve a marketing plan objective. Businesses may develop product differentiation strategies, or an undifferentiated approach, involving specific products or product lines depending on the specific demand and attributes of the target segment.Positioning is the marketing activity and process of identifying a market problem or opportunity, and developing a solution based on market research, segmentation and supporting data. Positioning may refer the position a business has chosen to carry out their marketing and business objectives. Positioning relates to strategy, in the specific or tactical development phases of carrying out an objective to achieve a business’ or organization’s goals, such as increasing sales volume, brand recognition, or reach in advertising.

5.         Discuss procedures for determining the worth of a business.

6.         Develop project financial statements to reveal the impact of strategy recommendations.

7.         Perform EPS-EBIT analysis to evaluate the attractiveness of debt versus stock as a source of capital to implement strategies.

8.         Discuss the nature and role of research and development in strategy implementation.

9.         Explain how management information systems can determine the success of strategy-implementation efforts.

10.       Explain business analytics and data mining.

 

 TWEET YOUR ANSWER TO THIS:

ASSURANCE OF LEARNING EXERCISE 8F:

DEVELOP A PRODUCT-POSITIONING MAP FOR YOUR UNIVERSITY

 Steps for developing a product-positioning map include:

  1. Select key criteria that effectively differentiate institutions of higher education.
  2. Diagram a two-dimensional product-positioning map with specified criteria on each axis.
  3. Plot major competitors in the resultant four-quadrant matrix.
  4. Identify areas in the positioning map where the university could be most competitive in the given target market.
  5. Use Online programs like University of Phoenix in your diagram

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Related articles

The Boston Consulting Group Matrix

English: Folio plot of a BCG Matrix Analysis u...

English: Folio plot of a BCG Matrix Analysis using an example data set. The folio plot visualizes the relative market share of a portfolio (hence the name) of products versus the growth of their market. The measurements are visualized as squares. The objects are visualized with circles that differ in size by their sales volume. The PNG was created with Foliomap. (Photo credit: Wikipedia)

Boston Consulting Group

Boston Consulting Group (Photo credit: Wikipedia)

Industry attractiveness and business strength scores are used to generate a Boston Consulting Group Matrix. Industry attractiveness or industry growth rate is plotted on the vertical axis and competitive strength or relative market share on the horizontal axis. four-cell matrix emerges. The locations of the business units on the attractiveness-competitive strength can provide guidance in deploying corporate resources for a diversified company. the size of each bubble in the diagram is scaled to the percentage of revenues generated by each business unit.

Watch these videos:

The growth–share matrix

BCG Matrix Example

BCG Matrix Example (Photo credit: Wikipedia)

was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units and their product lines. plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and growth rates.

  • Cash cows: the company has high market share in a slow-growing industry. “They generate substantial cash surpluses over what is generally needed to fund their operations.”
  • Dogs are units with low market share in a mature, slow-growing industry.
  • Question marks (also known as problem children) are business operating in a high market growth, but have a low market share.
  • Stars are units with a high market share in a fast-growing industry.
“As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.”

As BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities.

The balanced portfolio has stars whose high share and high growth assure the future.

 

1. To compute relative market share divide the leader’s share by #2 if you are the leader

2. To determine the industry growth rate use the industry reports in the Library databases.

 

Viewing a diversified group of businesses as a collection of cash flows and cash requirements helps managers understand the ramifications of resource allocation and cash flow. The company needs adequate financial strength to fund its various businesses to achieve financial targets.

 

Here’s my Pinterest Board:

http://www.pinterest.com/socialmediaevie/boston-consulting-group-matrix/