FACTORS AFFECTING THE SELECTION OF ENTRY MODE

EXTERNAL FACTORS

INTERNAL FACTORS

Market size Market growth Govt. regulations Level of competitionPhysical Infra structure Level of risk –political, economical ,operational Production and shipping cost

Company objectives Availability of company resource Level of commitment Internal experience Flexibility

External FactorsMARKET SIZE:Large market size justify the mode of entry

with long term commitment requiring higher level of investment like wholly owned subsidiaries or equity participation

To take advantage of market size number of Indian companies are in the process of committing more resources to the Chinese market

Ex Ranbaxy entered Chinese market in a joint venture and emerged as a market leader with the brand Cifran

External FactorsMARKET GROWTH Most of established markets

likeUSA,Japan,Europe has reached a point of saturation for consumer goods such as automobiles ,consumer electronics like TV, fridge, washing machine etc so the growth in these countries is showing declining trend.

Firm invests in markets with high growth potential such as China ,India ,Thailand ,Indonesia etc .these are called as emerging markets

External FactorsGOVERNMENT REGULATIONS : The selection of market is greatly influenced by the

legislative framework of the overseas market Govt in gulf countries has made it compulsory for foreign

firms to have a local partner. UAE is a lucrative market for Indian firms but most firm

operate there with a local partner Trade barriers such as ecological regulations affect mode

of entry .this major reason for increased FDI in Mexico which is part of NAFTA(north American free trade agreement)

To cater US market . Japanese automobile firm set up their units in the European Union mainly due to high tariff on automobiles that foreign firms were forced to set up manufacturing units especially in the automobile sector in china

External FactorsLEVEL OF COMPETITION Presence and involvement of competition in an over

seas market is crucial factor in deciding on entry mode .

Ex In auto companies setting up their operations in India and other emerging markets so as to effectively respond to global competition .

PHYSICAL INFRA STRUCTURE Level of development of infrastructure like roads

railways, metros , telecommunications, FI, and marketing channel is a pre condition for a company to commit more resources to an overseas market

Countries like Singapore, Dubai, Hongkong see major investment only because of infrastructure development

EXTERNAL FACTORS

LEVEL OF Risk There are 3 types of risks 1. Political risks : Political instability and turmoil dissuades the

firms from pouring in more resources to the market .

Companies invest more in countries with a stable Govt. and transparent legal systems

The political system in developed countries like USA, UK , Japan , Australia is more less stable

Political system is highly instable in countries like Iraq,Pakistan,Fiji, Argentina , Brazil etc

External Factors2.ECONOMIC RISKS :

Economic risk arise due to volatility of exchange rates of the target markets currency , upheavals in balance of payment situations that may affect the cost of other inputs for production , and marketing activities in foreign market

International companies find it difficult to manage operations in markets where inflation is very high .

As seen in countries like Brazil , Argentine so most Companies prefer to enter these markets by way of licensing and franchising rather than equity participation.

Firms invest more in those countries with higher economic stability

3.Operational risk

External FactorsOPERATIONAL RISK :If the marketing system in an over seas

country is similar to that of the firms home country, the firm has a better understanding of operational problems in the foreign market in question

Ex. The absence of organized retailing system in India provides Indian exporters a strategic edge when operating in other developed countries , which do not have organized retailing system

External FactorsPRODUCTION AND SHIPPING COSTSMarkets with substantial cost of shipping

as in case of low value high volume goods may increase the logistics cost .

The increased chipping cost may not only be due to the longer distance but also because of lack of availability if competitive shipping lines as I case of shipping goods from India to most African and Latin American countries

INTERNAL FACTORSCOMPANY OBJECTIVES:

Cos entering international market with an reactive approach to international marketing opportunities

In such cases Co. receives unsolicited orders from acquaintance ,firms and relatives based abroad and they attempt to fulfill these export orders

Strategic objective of proactive co make them enter into international markets through investment modes of entry

INTERNAL FACTORS AVAILABILITY OF COMPANY

RESOURCES Entering IM need substantial commitment

from financial and human resource and therefore the choice of an entry depends on the strength of financial strength of the firm.

Ex . Indian firms with good financial strength have entered the International market by way of wholly owned subsidiaries or equity participation

INTERNAL FACTORSLEVEL OF COMMITMENT :WRT market potential , the willingness of the

company to commit resources in a particular market also depends on the way the co is willing to perceive and respond to competitive forces .

Companies need to evaluate various investment alternative for allocating scare resource

INTERNATIONAL EXPERIENCE :A co well exposed to the dynamics of the

International marketing environment would be at ease when making a decision regarding entering IM with a highly sensitive mode of entry such as JV and wholly owned subsidiaries

INTERNAL FACTORSFLEXIBILITY :Companies should keep in mind exit

barriers when entering international markets

A market which presently appear attractive may not necessarily continue to be so say next 20 years.

There could be changes in political, legal, structures and changes in customer preferences so markets may be favorable now may show exit over a period of time so need to be approached by way of strategic alliance

Modes of international Market entry

The approach to international expansion a company chooses based on desired control and on the risk it can afford .

Indirect exporting An export entry mode where by a company sells

its products in the company's home country to intermediaries who in turn sell the product overseas

Middle man can be used such as export management companies ,trading companies, agents or brokers

These manage distribution operations in Int.markets

Eg. Merchant exporter

Cooperative exporting/piggy backing/mother Henning Using the distribution system of exporters

with established systems of selling abroad who agree to handle the export function of a non competing company on a contractual basis

Such companies are paid on commission or are charged a discount price for the product.

They are larger companies with extensive experience in and knowledge of target international markets .

PIGGY BACKINGIn PIGGY BACKING the company exporting is known as rider with inadequate experience of operating marketing channels and uses a foreign company which has an established distribution network in the foreign markets known as carrier

Direct ExportAn export entry mode where by a firm

handles its own exports usually with the help of an in-house exporting department.

Such companies have more control over the marketing mix in the target market.

They make sure that the wholesale and the retailer observe the companies marketing policies ,charging the suggest sales price , offering the appropriate promotions and handling customer requests promptly and satisfactorily.

Direct exporting Companies bear the cost involved in selecting

and monitoring the different intermediaries involved in distribution, freight forward, shipping lines , insurers , and retailers.

Co bears the cost for marketing service providers, such as consultants , marketing research and advertising companies .

One ex for opening new opportunities for direct exporting is internet .

Some co do catalogue retailing and dot.com companies , like Amazon etc

Licensing An international entry mode that involves a

licensor, who shares the brand name, technology and know how's with a licensee in return for royalties .

Licensor : the owner of a product license who agrees to share know how's , technology , and brand name with the licensee in return for royalties .

Licensee: the purchaser of the license who pays royalties to the licensor for the rights to use the licensors technology , know how's and brand name

Licensing Licensing presents more risk to the Co. but

offers more control than exporting .It involves a licensee and a licensorThe licensor offers know how's , shares technical

information, and often shares a brand name with the licensee

The licensee performs following functions :Production of the licensors products covered by

rights Marketing these products in the assigned

territory Paying royalties to the licenser for using the

intellectual property

Licensing with out name The product mfged under license are of

highest quality When quality cannot be maintained it is

desirable for products produced under license not to carry the licensors brand name

Example In Italy fiat granted licensee to Avto VAZ

Russia’s largest automobile manufacturer lada.

France Renault granted license to build Dacia brand automobiles in Romanian

Licensing advantages It is lower risk entry mode It permits the Co access to market that may

be closed or may have high entry barrier In the event of natural disaster or Govt.

takeover , the licensor licensing without name incurs only loss of Royalties

The licensor that permits the use of the name may suffer loss of reputation in the short term if the product s are mfg without licensors supervision / if they do not uphold licensors standard .

Licensing advantagesIt facilitates rapid penetration in international market

for technology intensive products and process.Provides access to markets with high level of tariff and

non tariff barriers .It reduces political and economical risk associated with

international markets and therefore provides opportunities to venture into more sensitive markets

It helps the international licenser to rapidly expand into international markets and amortize the expenditure incurred on R&D

In case of developed and developing countries where forged products are in high circulation in the market , licensing helps in curtailing the duplicate products market.

Contractual entry mode A company may enter international markets using

synergistic effect of a partner firm and make use of its resources .

This is mutually beneficial for both the firms as it provides them access to new technology and markets .

Firms having high tech products or +manufacturing facilities but no access to foreign market may use a foreign partner that is well established and has got a strong distribution and marketing network in the foreign market

Example:Tata tea ltd which is one of largest tea companies in

the world now had entered into contractual entry mode with Tetley group in UK which had strong presence in Europe, US and Australia

Consortia Consortia involves 3 or more companies Ex consortia involves some companies

with a substantial percentage of Govt. ownership is Air Bus Industries .airbus is an international consortium involving France (Aerospatiale with a 37.9 percent ownership),the UK (British aerospace with a 20 % ownership), Germany (Daimler Chrysler DSA subsidiary , with a 37.9 percent ownership ) Spain with 4.2 % ownership

Wholly owned subsidiary The entry mode that affords the highest

level of control and present the highest level of risk to a company , it involves establishing a new company that is a citizen of the country where the subsidiary is established.

Co can over come some of the disadvantage offered by partnering with other firms by setting wholly owned subsidiaries

Wholly owned subsidiary Assumptions of wholly owned subsidiary 1. The company can afford the costs

involved in setting up a WOS.2. The Co is willing to commit to the

market in long term 3. The local Govt. allows foreign

companies to set up WOS on its territory.

Wholly owned subsidiary Companies can develop its own subsidiary ,

referred to as Green field, which represents a costly proposition , or it can purchase an exisisting company through acquisitions or mergers

Govt have been de socializing services and industries , rapidly privatizing industries that were formerly Govt owned or operated

Ex opportunities in areas like telecommunications ,health care ,energy etc

Wholly owned subsidiary Advantages Provide relative control of company

operations in the target market .Control on how to handle revenue and profits It also carries greatest level of risk .Ex In case of Daimler Chrysler , Daimler found

that Chrysler was not performing up to the par and quickly proceeded to restructure , weeding out the former Chrysler employees .

FRANCHASINGFranchising is a mode of entry for the service industry

and it is the service industry equivalent to licensing .Ex service sectors like healthcare, personal

wellbeing ,education training , specialty retailing etc

The FRANCHISER known as home company gives the FRANCHISEE or overseas company intellectual property and other assistance over an extended period of time

OR the right to use its brand name and all relate trademarks

and its business know how's such as secret recepies and customer interfacing technique, the franchisor may also provide the franchisee with advertising and sales promotion support – all in return for royalties

FRANCHASINGThere are 2 parties involved like licensing

Franchiser and franchisee .Franchisee acquires the right to market the

producers products and services in a prescribed fashion using the franchisers brand name , processing and production methods and marketing guidelines.

He pays royalties in terms of money Franchiser- who gives the franchisee the right to

use brand name and all related trademarks and its business know how's such as secret recepies and customer interfacing technique, in return for royalties.

FRANCHASING ADVANTAGES Franchising is a form of licensing where

in transfer of IPR takes place .It is a low cost and low risk mode of

entry It provides firm opportunity to rapidly

penetrate overseas where it has little market knowledge and strength

Transfer of knowledge is an on going process

Co exerts high control franchisee operations which ensures uniform quality and service standards across markets

DISADVANTAGE -FRANCHASINGThe franchisers some times find it difficult to coordinate and

control a large number of franchises In many developed and developing countries the concept of

franchising hardly exists .And international marketers find it difficulty to identify and

select franchising partners In major countries franchising associations and their websites

provide useful service information Ex McDonald's restaurants in France often found a quick copy

cat setting up around the corner Ex – McDonalds , Carrefour hypermarket ,pizza hut ,

KFC ,Benetton are international franchising Benetton- the franchiser need to achieve minimum sales target

follow marketing guide lines , and must adhere to standard shop layout. However the franchiser are not required to pay any franchising fees .

JOINT VENTURE When a firm is willing to take complete

control of its overseas operations in the international markets , it opts for equity participation with an over seas firm

A JV involves more than 2 firms in equity participation

In JV the 2 or more companies involved provid a complementary advantage for formation of a new company .

Thus in JV the participating company contribute their complementary expertise and resources

JOINT VENTURE The basic difference between a JV and strategic alliance

is that unlike JV a SA has no equity participation from 2 firms .

Reasons for forming JV :To over come FI barriers specially in Developing and

least developed countries .To manage the emerging new opportunities with

complementary technology or management skills provided by JV.

To over come operational barriers i.e. establishing contacts with Govt and local officials

To achieve competitive advantage in global operations with low investments

JOINT VENTURE BENEFITS Provide access to international markets

with high tariff and other import barriersProvide access to the strengths of local

firms including their supply chain and distribution channels in foreign markets.

Provide instant access to operational knowledge so that company has perception of being local in foreign markets

Reduce political and economic risks

JOINT VENTURE BENEFITS Provide opportunities to Indian firm with

strength in technical and process know how's to enter international markets

Provide access to foreign capital market.Facilitate shifting of manufacturing

operations to low production countries.Provide greater control over production

and marketing functions Facilitate firms to strengthen their

competitive position in International markets

JOINT VENTURE DISADVANTAGES Greater risk as compared to modes of entry without equity participation.

Conflict between partners may adversely affect a joint venture’s performance

STRATEGIC ALLIANCES All joint ventures and licensing and franchising

agreements are considered to be strategic alliances between companies attempting to reach joint corporate and market related goals.

This address to those formats which are short term in nature and that do not entail same level of commitment as the previous categories

Such alliances crop up frequently and have various forms and degree of alliance

They vary from a contract manufacturing agreement that requires the contracting firm to provide raw material and training to the contracting factory in return for production that could last for 2yrs for an exchange of loyalty points between companies

ACQUISITION An Indian company can acquire a foreign

company and all its resources in a foreign market.

Acquisition provides speedy access to the resource of a foreign company such as skilled manpower ,the Co’s products and brand ,and its distribution channel .

Opportunistic JV often happens with a acquisition of a weaker firm with a stronger partner

Ex of acquisitions Tata motors with Daewoo ,Korea worth 118

m $.Reliance with flat telecom in Bermuda worth

207 m US $ Wipro with nerve wire USA worth 18.7

million $

TYPES OF STRATEGIC ALLIANCES 1.MANUFACTURING ALLIANCE 2.MARKETING ALLIANCE 3. DISTRIBUTION ALLIANCE

1.MANUFACTURING ALLIANCE A no equity relationship between 2 firms , in which

one firm handles the others manufacturing or some aspect of the manufacturing process

M.A covers many types of alliances from contract manufacturing to technological ,engineering, and Rand D alliances

Ex MA between the US company Motorola Inc. and Singapore Flextronics International ltd .

Flextronics has manufacturing contracts for infrastructure and cell phones

Porsche has engaged in different type of technical alliance with Harley Davidson, helping to develop low noise ,low emission motorcycles .

Porsche is helping Harley Davidson to develop its water cooled revolution engine

2.MARKETING ALLIANCE A no equity relationship between 2

firms , in which one firm handles the others marketing or some aspect of the marketing process

Marketing alliance focus on all aspects of marketing

Ex Opel the German subsidiary of US auto manufacturers general motors signed a 2 year contract of to market its automobile to 6.5 million American online subscribers in Germany

3. DISTRIBUTION ALLIANCE

A no equity relationship between 2 firms , in which one firm handles the others distribution or some aspect of the distribution process

Ex mitsui and Mitsubishi has set up distribution alliances with coca cola in Japan , bottling and distributing all coke products in the market