Entering New MarketOutside Home Country

Deciding How to enter the market.Deciding How to enter the market.

An entry strategy should reflect an analysis of market potential, company stabilities and the degree of marketing involvement and the commitment the management is prepared to make.

Approaches could either require minimal investment and be limited to infrequent exporting or large investments of capital and management effort to capture and maintain a permanent, specific share of world markets. – BOTH APPROACHES CAN BE PROFITABLE.

Look at factors of commitment, risk, control and profit potential.

Entry Strategies – Criteria for SelectionEntry Strategies – Criteria for Selection

- Speed of Market Entry Desired:Setting up a WOS vis-à-vis Agent / Distributor to ensure

quick / effective distribution in the foreign market.

- Costs (to include direct as well as indirect):Indirect like inland freights, strikes, disruptions to output,

lack of power supply, irregularity of raw materials.

- Flexibility Required:Appointment of agent / distributor required only where it is

deemed unlikely that there will be much future expansion by the company

directly into that market.

Entry Strategies – Criteria for SelectionEntry Strategies – Criteria for Selection

- Risk Factors:Risk may be diminished by minimizing the investment

stake in thecompany by accepting local joint venture partner etc. Also

importantare third country risks – boycotts (Arab world for Israel )

- Investment Payback Period:Short term pay back realized from licensing and

franchising dealswhereas joint ventures or wholly owned subsidiaries will tie

up capital for a number of years.

- Long-term profit Objectives:Related to the growth envisagedin that market for the years ahead.

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Basic foreign expansion Entry DecisionsBasic foreign expansion Entry Decisions

A firm contemplating foreign expansion must make three decisions

Which markets to enter

When to enter these markets

What is the scale of entry

Which foreign marketsWhich foreign markets

Favorable Politically stable developed and developing

nationsFree market systemsNo dramatic upsurge in inflation or private-

sector debt

UnfavorablePolitically unstable developing nations with

a mixed or command economy or where speculative financial bubbles have led to excess borrowing

Timing of entryTiming of entry

Advantages in early market entry:First-mover advantageBuild sales volumeMove down experience curve and achieve

cost advantageCreate switching costs

Disadvantages:First mover disadvantage - pioneering

costsChanges in government policy

Scale of entryScale of entry

Large scale entryStrategic Commitments - a decision that

has a long-term impact and is difficult to reverse

May cause rivals to rethink market entryMay lead to indigenous competitive

response

Small scale entry:Time to learn about marketReduces exposure risk

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FOREIGN MARKETENTRY

MANUFACTURINGAT HOME

MANUFACTURINGABROAD

INVESTMENTENTRY

EXPORTING

INDIRECTDIRECT

“PIGGY- BACKING”

CONTRACTUAL

LICENSING/FRANCHISING

CONTRACTMANUF.

TURNKEYPROJECTS

MGTCONTRACTS

OVERSEASASSEMBLY/

MIXING

JOINT VENTURES

ACQUISITION/SELF-BUILT

OTHER DIRECTENTRY

Entry StrategiesEntry Strategies

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Entry modesEntry modes

Licensing &Franchising Exporting Use of Agents/Distributors Turnkey Projects Joint Ventures Wholly Owned Subsidiaries Contract Manufacturing FDI Mergers & Acquisitions Strategic Alliances

Licensing & FranchisingLicensing & FranchisingLicensing

Under International Licensing , a firm in one country (the licensor ) permits a firm in another country (The licensee) to use its intellectual property (such as patents, trademarks, copyrights, technology, technical know how, marketing skill or some other specific skill) –Walt Disney, Nike

Franchising

It is a form of licensing in which a parent company (the franchiser ) grants another independent entity (the franchisee) the right to do business in prescribed manner. This right can take the form of selling the franchisors products, using its name, production and marketing techniques, or general business approach.eg Coca Cola supplying syrup to the bottlers.

Forms of franchising Manufacturer – Retailer systems (Automobile dealerships). Manufacturer- Wholesaler systems. (Soft drink companies) Service firm –Retailer systems (Lodging services and fast food

outlets)

LicensingLicensingMeans of establishing foothold in foreign

markets without large capital outlays

Patented rights / trademark rights and rights to use technological processes are granted in foreign licenses

Confers only a right to use a company specific and patent-protected process in manufacturing.

Right is conveyed in the transferal of original blueprints and designs.

In its simplest form, it may involve the transmittal of original designs.

Important criteria = “KNOW –HOW” agreements.

LicensingLicensing

AdvantagesAdvantages

Capital requirement is scarce Import restrictions forbid other means of entry A country is sensitive to foreign ownership or When it is necessary to protect patents and trademarks

against cancellation or non use. Increases the income on products developed as a result of

expensive research. To retain a market to which export is no longer viable cost of

import prohibitions, quotas, duties, transportation costs, lack of production facilities etc.

To make possible the rapid exploitation of new ideas on world markets before competitors get into the act.

For the licensor it becomes easier to handle more export markets this way.

Licensing is a viable option where manufacture near to the customers base is required.

LicensingLicensingDisadvantagesDisadvantages

The firm has less control over the licensee than if they were to set up their own facility.

The danger of fostering competition The fact that there is often a ceiling to licensing

income per product, sometimes about 5% on the selling price, innovating products at least could rate higher rewards if marketed in other ways.

The licensee may prove less competent than expected at marketing or other management activities, hence the licensor may find his commitment is greater than expected. Eventually costs may grow faster than income.

Negotiations with licensee and or the local govt are costly and often protracted.

Is a rapidly growing form of licensing in which the franchisor provides a standard package of products, systems and management services and the franchisee provides market knowledge, capital and personal involvement in management.

Potentially the franchise system provides an effective blending of skill centralization and operational decentralization

In England – for eg – annual franchised sales of fast foods is nearly 2 Billion US $ , which accounts for 30% of all foods eaten outside the home.

- eg Beijing KFC has the highest sales volumes of any KFC store in the world.

FranchisingFranchising

TYPES OF FRANCHISE AGREEMENTS:

A) MASTER franchise – gives the franchisee the rights to a specific area with the authority to sell or establish sub franchises.

( eg Mc’Donalds)

B) LICENSING franchise – right to use a product / good / service or any other asset for a fee

( eg Coco Cola licenses local bottlers in a an area or region to manufacture and market Coco – Cola using syrup sold by Coco Cola. Rental car companies often enter foreign market by licensing a local franchisee to operate a rental system under a trade mark of the parent company. )

FranchisingFranchising

FranchisingFranchising

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FranchisingFranchising

Advantages:Advantages: Reduces costs and risk of establishing

enterprise

Disadvantages:Disadvantages: May prohibit movement of profits from one

country to support operations in another country

Quality control

A company may manufacture locally to capitalize on low cost labor, avoid high import taxes, reduce high cost of transportation, gain access to ease in availability of Raw material.

This method is suitable for firms that have high marketing skills but having relatively poor manufacturing

facilities.

When host govt deliberately blocks all other modes, this mode is suitable.

Contract ManufacturingContract Manufacturing

CContract Manufacturingontract Manufacturing

Advantages The company does not have to commit resources for setting

up production facilities. It frees the company from the risks of investing in foreign

countries. If idle production capacity is readily available in the foreign

market , it enables the marketer to get started immediately. The cost of product obtained by contract manufacturing is

lower than if it were manufactured by the international firm. Risk involved is less. It may enable the international firm to enlist national support.

Disadvantages Loss of potential profits from manufacturing Less control over manufacturing process Risk of developing potential competitors. Not suitable for high tech products involving technical

secrets.

Direct ExportingDirect Exporting From home country This means is the easiest and most common Risks and financial losses can be minimized ( over indirect

exporting ) Early motives are to skim the cream form the market or gain

business to absorb overheads.

Forms: Export department Overseas sales branch or subsidiary Traveling representative Foreign based distributors / agents – who would buy the

goods and own it – might be given exclusive rights to represent the manufacturer.

ExportingExportingWhy Exporting (Direct or indirect Exporting) The volume of foreign business is not large enough to justify

production in the foreign market. Cost of production in foreign market is high. The foreign market is characterised by production bottle necks like

infrastructural problems, problems with material supplies,etc. There are political or other risks of investment in the foreign

country. The company has no permanent interest in foreign market

concerned, or there is no guarantee of the market available for a long period.

Foreign investment is not favoured by the foreign country concerned.

Licensing or contract manufacturing is not a better alternative. Under utilised capacity exists.

Why not exporting Policies of some governments discriminate against imports. Foreign production economical

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ExportingExporting

Advantages:Avoids cost of establishing manufacturing

operationsMay help achieve experience curve and

location economies

Disadvantages:May compete with low-cost location

manufacturersPossible high transportation costsTariff barriersPossible lack of control over marketing

reps

Turnkey ContractsTurnkey Contracts

These are common in international business in the supply , erection and commissioning of plants , as in the case of refineries , steel mills , cement and fertilizer plants, etc. construction projects as well as franchising agreements.

It is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. There term is sometimes used in fast food franchising when franchiser agrees to select a store site , build the store, equip it, train the franchisee and employees, and sometimes even arrange for the financing.

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Turnkey projectsTurnkey projects

Advantages:Can earn a return on knowledge assetLess risky than conventional FDI

Disadvantages:No long-term interest in the foreign

countryMay create a competitorSelling process technology may be selling

competitive advantage as well

Joint VentureJoint Venture A joint venture is simply a partnership at corporate

level, and it can be domestic or International. JV is an enterprise formed for a specific business purpose by two or more investors sharing ownership and control.

Can be defined as “The commitment for more than a short duration of funds, facilities and services by two or more legally separate interests to an enterprise for their mutual benefit”

JV’s go deeper than mere trade relationships since it concentrates on the deliberate alliance of resources between two independent organizations in order to mutually improve their market growth potential.

Joint VenturesJoint VenturesEg Time Warner Entertainment and Taiwan Pan Asia

Investment Company have formed a joint venture called Tai Hua International Enterprise Co. Ltd for purpose of providing products and services to Taiwan’s emerging cable TV industry.

JV’s are of TWO TYPES:

a) Joint Equity Venture

b) Contractual joint Venture.

Joint VenturesJoint Ventures

Joint Equity Venture

Wherein each of the respective partners contributes a sum either in equity or technological know-how in return for a given stake in the operation of a joint venture.

Are open ended and not fixed.

Suffer in that the absorption of local equity capital from the foreign market will dilute the company / country equity base.

Joint VenturesJoint Ventures

Four factors associated with JV’s:

are established , separate legal entities they acknowledge intent by the partners to share in

the management of the JV they are partnerships between legally incorporated

entities such as companies , chartered organizations or governments

equity positions are held by each of the partners.

Joint VenturesJoint Ventures

Contractual Joint Venture

Commonly referred to as industrial co-operation (ICA’s coined by the UN)

Unlike joint-equity ventures the investment stake may be say in technology on one side only.

The duration is well defined and laid down in the contract which designates the respective tasks and responsibilities of each party over the period of a joint venture.

Eg – Boeing pressed by capacity shortages, averted an operational crisis by turning to its rival LOCKHEED for a loan of 600 workers.

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Joint VenturesJoint Ventures

Advantages:Benefit from local partner’s knowledge.Shared costs/risks with partner.Reduced political risk.

Disadvantages:Risk giving control of technology to

partner.May not realize experience curve or

location economies.Shared ownership can lead to conflict

Are developed for pooling financial and managerial

resources and to lessen risks.- eg for huge construction

projects.

Similar to a JV except for the following two

characteristics:

They typically involve a large number of participants

They frequently operate in a country or market in which none of the participants is currently active.

ConsortiaConsortia

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Wholly owned subsidiaryWholly owned subsidiary

Subsidiaries could be Greenfield investments or purchase (acquisition or merger)

Advantages No risk of losing technical competence to a

competitor Tight control of operations. Realize learning curve and location economies.

Disadvantage Bear full cost and risk

Branch Subsidiary

1. Branches are simple to set up.

1. Usually incorporated as a limited company.

2. Parents firm looks after the accounting procedure.

2. Independently audited. However there is no need to disclose accounts to host country norms.

3.Branch profits are taxed at head office even if they are not repatriated.

3. Carries local identity & can procure govt. grants as per local norms.

4.Assets can be transferred from parent to branch without tax liability, however special tax rules apply depending on the country.

4. It can raise capital and is entitled to sell shares to outsiders.

Merger & AcquisitionMerger & AcquisitionMerger When 2 companies join together to become

one entity. One or both lose their identity. Example. Air India – Indian Airlines.

Acquisition Take effective control over assets or

management of another company. Entity does not change. Example. Tata – Corus.

Merger & AcquisitionMerger & AcquisitionAdvantages Economies of scale, which reduces unit costs Reduces competition if a rival is taken over. New skills and specialist departments are added

to the business. It is easier to raise money for a larger business

Disadvantages

Clashes of culture between different types of businesses can occur

May be a conflict of objectives between different businesses

Foreign Direct Investment Foreign Direct Investment (FDI)(FDI)

Foreign direct investment (FDI) or foreign investment refers to long term participation by country A into country B.

Advantages Causes a flow of money into the economy which

stimulates economic activity Employment will increase Technology transfer and improvement in quality of

products

Disadvantages Inflation may increase slightly Domestic firms may suffer if they are relatively

uncompetitive

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Strategic AlliancesStrategic Alliances

Alliance may be in the areas of production, distribution, marketing and research and development. Eg Sony and Philips ally to compete with another alliance led by Toshiba in developing DVDs

Almost all major Airlines have joined one of the three strategic groups: Star, Sky team and One World.

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Characteristics of a strategic Characteristics of a strategic alliancealliance

Independence ofParticipants

SharedBenefits

Ongoing Contributions

Markets

Cooperation

Benefits

Control Products

Technology

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Structuring the alliance to reduce Structuring the alliance to reduce opportunismopportunism

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Alliances are popularAlliances are popular High cost of technology development Company may not have skill, money or

people to go it alone Good way to learn Good way to secure access to foreign

markets Host country may require some local

ownership

Strategic AlliancesStrategic Alliances

Advantages:Facilitate entry into marketShare fixed costsBring together skills and assets that

neither company has or can developEstablish industry technology

standards

Disadvantages:Competitors get low cost route to

technology and markets

Advantages and disadvantagesAdvantages and disadvantages of entry modes of entry modes