METHODS OF ENTRY IN FOREIGN MARKETS

It does not matter how much big you are, but it matters much, how do you enter to succeed

BASIC MARKET ENTRY DECISION - WHICH MARKET

200 nation-states
Different

for firms Size of market Purchasing power (present wealth) Future wealth

long-run profit potential

EXAMPLE:A

tyre manufacturing company, seeking to export tires should collect the data like transportation infrastructure, alternative modes of transportation, petrol prices, increase in vehicle ownership, production of vehicles in the prospective foreign markets.

Sometimes the companies use the proxy data. For Example:Whirlpool used the data of other household appliances while deciding to introduce dishwasher in South Korean market.

Balance

markets
Future

cost & risks rank

economic growth rates Free market system & countrys capacity for growth Favorable = Stable and developing markets without upsurge in inflation rates or private-sector debt

 The

companies planning to enter global markets should know the trade policies, general legal and political environment of the foreign markets. In order to avoid high tariffs, General Motors, Ford, Audi and MercedesBenz have established manufacturing facilities, i.e., auto factories in Brazil. They also export from Brazil to other nearby countries.

Value

that an international business can create in a market

Suitability

of product for market Nature of indigenous competition Not widely available & satisfies an unmet need Greater value = ability to charge higher prices & build sales volume more rapidly

BASIC MARKET ENTRY DECISION TIMING OF ENTRY

Early

entry - Firm enters foreign market before other foreign firms mover advantage Ability to preempt rivals & capture demand by establishing strong brand name Build sales volume and ride down the experience curve with a cost advantage Create switching cost that tie customers into products & services

First

 Companies

should also use data regarding prospects for growth of the market. Procter & Gamble and Unilever entered Central and Eastern European countries immediately after the collapse of communism in these countries. These firms established production facilities, distribution channels etc. in these countries in order to get first-mover advantages.

First

mover disadvantages Pioneering costs

Time

rules Mistakes due to ignorance Liability of being a foreigner Costs of promoting & establishing a product educating customers (KFC in China -> benefit to McDonalds)

& effort in learning the

MODES OF ENTRY IN FOREIGN MARKETS

EXPORTING

ADVANTAGES OF EXPORTING INCLUDE:-

Need for limited finance:

If the company selects a company in the host country to distribute, the company can enter international market with no or less financial resources. Alternatively, if the company chooses to distribute on its own, it needs to invest financial resources, but this amount would be quite less compared to that would be necessary under other modes.

Less Risk:Exporting involves less risk as the company understands the culture, customer and the market of the host country gradually. The company can enter the host country on a full-scale, if the product is accepted by the host countrys market.

Motivation for exporting:Motivation for exporting are proactive and reactive. Proactive motivations are opportunities available in the host country. Reactive motivations are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country.

FORMS OF EXPORTING

DIRECT EXPORTING
In

direct exporting the company sells to a customer in another country It is selling the products in a foreign country directly through its distribution arrangements or through a host countrys company.

Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally in 1995 it established its ice cream plant in Moscow.

INDIRECT EXPORTING
Indirect

exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product

INTRACORPORATE TRANSFERS
I

T are selling of products by a company to its affiliated company in host country. of products by Hindustan Lever in India to Unilever in USA. This transaction is treated as exports in India and imports in USA.

Selling

ENTRY MODES - EXPORTING

Advantages

Disadvantages

Avoids the often substantial cost of establishing manufacturing May help firm achieve experience curve & location economies Firm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips)

Not appropriate if lower cost manufacturing locations High transport costs can make exporting uneconomical especially bulk products Tariff barriers can make exporting uneconomical If firm delegates marketing, sales & service to another company they may have divided loyalties because they carry competing products or are a large MNE (Diebold)

LICENSING

 In

this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e. technology, work methods, patents, copy rights, brand names, trade marks etc. to a manufacturer in a foreign country for a fee. the manufacturer in the domestic country is called licensor and the manufactuer in the foreign country is called

Here

BASIC ISSUES IN INTERNATIONAL LICENSING

Companies

should consider various factors in deciding negotiation. Each international licensing is unique and has to be decided separately. there are certain common factory which affect most of the international licesnses.

However,

BOUNDARIES OF THE AGREEMENTS

The

companies should clearly define the boundaries of agreements. They determine which rights and privileges are being conveyed in the agreement.

EXAMPLE:Pepsi-cola granted license to Heineken of Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the boundaries are: (i) Heineken should not export Pepsi-Cola to any other country. (ii)Pepsi supplies concentrated coal syrup and Heineken adds carbonated water to produce beverage. (iii)Pepsi can grant license to other companies in Netherlands to produce other products of Pepsi.

Determination Determining

of Royalty

Rights, Privileges and Constraints Settlement Mechanism Duration

Dispute

Agreement

ENTRY MODE - LICENSING

Advantages

Disadvantages

Receive royalties for granting the rights to intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks) Licensee puts up most of the capital to get the operations going mitigates development cost & risk Allows firm to participate where there are barriers to investment (Fuji-Xerox) Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing) Primarily used by manufacturing firms

Does not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economies Does not allow firm to coordinate strategic moves across countries by using profits earned in one country for competitive attacks in another Firms can lose control over the competitive advantage of their technological know-how. Cross-licensing can mitigate risk by holding each other hostage for misuse Firms can reduce risk by forming a joint venture with each party taking equity stakes

FRANCHISNG

 Franchising The

is a form of licensing.

franchisor can exercise more control over the franchised compared to that in licensing. franchising is growing at a fast rate.

International

UNDER FRANCHISING:
an

independent organization called the franchisee operates the business under the name of another company called the franchisor. this agreement the franchisee pays a fee to the franchisor.

Under

 The

franchisor provided the following services to the franchisee:

Trade

marks Operating system Product reputations Continuous support systems like advertising, employee training, reservation services, quality assurance programmes etc.

BASIC ISSUES IN FRANCHISING

The franchisor has been successful in the home country. McDonald was successful in USA due to the popular menu and fast and efficient services. The factors for the success of the McDonald are later transferred to other countries. The franchiser may have the experience in franchising in the home country before going for international franchising.

EXAMPLES:-

ENTRY MODE - FRANCHISING

Advantages

Disadvantages

Involves longer term commitment than licensing. Primarily used by service firms (McDonalds) Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain) Royalty payments that are some percentage of franchisees revenues Firm relieved of many costs & risks of opening new market.

No manufacturing so no location economies & experience curve May inhibit the ability to take profits out of one country to support competitive attacks in another Risk of worldwide reputation if no quality control

Firm can set up master franchise in each country subsidiary which is JV (McDonalds & local firm)

JOINT VENTURES

CONCEPT OF JOINT VESTURES

Two

or more firms join together to create a new business entity that is legally separate and distinct from its parents. Ventures are established as corporations and owned by the funding partners in the predetermined proportions. ventures are shared ownerships.

Joint

Joint

 Various

environmental factors like social, technological, economic and political encourage the formation of joint ventures. ventures provide required strengths in terms of required capital, latest technology, required human talent etc. and enable the companies to share the risks in the foreign markets.

Joint

 Joint

ventures involve the local companies. This act improves the local image in the host country and also satisfies the governmental requirements regarding joint ventures.

EXAMPLE : Massey-/Ferguson

entered into a 51% joint venture in Turkey to produce Tractors. Motor Corporation entered into a joint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles.

American

ENTRY MODE JOINT VENTURES

Advantages

Disadvantages

Typically 50/50 with contributed team of managers to share operating control Firm benefits from local partners knowledge of competitive conditions, culture, language, political system & business system Sharing market development costs & risks with local partner In some countries, political considerations make JVs the only feasible entry mode

Risk of giving away your technology to a partner Hold majority ownership for more control in venture Wall-off technology that is central to your core competency Does not give firm control over subsidiaries that it might need to realize experience curve or location economies Global strategic coordination firm use JV for checking competitor market share and limiting cash available for invading other markets (TI & Japan) Shared ownership can lead to conflicts & battles for control if goals/objectives change or they take different views on strategy

SUBSIDIARIES

According to Peter F. Drucker

It is simply now possible to maintain substantial market standing in an important area unless one has a physical presence as a producer.

 Multinational

companies also plan to enter into a new international market establishing themselves in overseas markets by direct investment in a manufacturing or assembly subsidiary company. view of frequently changing economic, social and political conditions globally, these whollyowned subsidiaries are highly risk averse.

In

wholly-owned subsidiary in manufacturing can involve investment in a new manufacturing or assembly plant or the acquisition of an existing plant (such as Coca-Cola Compnay purchases local bottling plant in developing countries). manufacturing is established abroad through direct investment, parts and components are often exported from the home country.

As

ENTRY MODE SUBSIDIARY

Advantages

Disadvantages

When there is technological competence wholly-owned subsidiary reduces risk over losing control Give firm tight control over operations in country -> engage in strategic coordination with profits Can realize location & experience curve economies centrally determined decisions

Most costly method of market entry Risk associated with learning to do business in a new culture Political risks is also involved in foreign investment

ACQUISITIONS

 Domestic

companies enter international business through mergers and acquisitions. domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. the domestic company may purchase the foreign company and acquires its ownership and control.

Alternatively,

 Domestic

business selects this mode of entering international business as it provided immediate access to international manufacturing facilities and marketing network. the domestic company faces serious problems in gaining access to international market.

Otherwise,

ENTRY MODE ACQUISITION

Advantages

Disadvantages

The company immediately gets the ownership and control over the acquired firms factories, employees, technology, brand names and distribution networks. The company can formulate international strategy and generate more revenues.

Acquiring a firm in a foreign country is a complex task involving bankers, lawyers, regulations, mergers and acquisition specialists from the two countries. Labor problems of the host countrys company are also transferred to the acquired company. Sometimes host countries imposed restriction on acquisition of local companies by the foreign companies.

STRATEGIC ALLIANCES
Look at the sky. We are not alone. The whole universe is friendly to us and conspires only to give the best to those who dream and work.

global strategic alliance is an agreement among two or more independent firms to cooperate for the purpose of achieving common goals such as a competitive advantage or customer value creation. partnerships may emerge in many forms including research and development consortiums, coproduction alliances, co-marketing partnerships, cross-licensing and cross-equity arrangements.

Strategic

 This

strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitiors, existing or potential in critical areas, instead of competing with each other. alliance is also sometimes used as a market entry strategy.

Strategic

FOR EXAMPLE :

A U.S. pharma firm may use the sales promotion and distribution infrastructure of a Japanese pharma firm to sell its products in Japan. In return, the Japanese firm can use the same strategy for the sale of its products in the U.S. market. The Isuzu Motors Ltd. And Fuji Heavy Industries Ltd. Of Japan have set up a joint plant in the U.S. which can build cars for Fuji and trucks for Isuzu in the same line.

CONTRACT MANUFACTURING

 Under

Contract Manufacturing, a company doing global marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product. are a number of multinationals and affiliates of multinationals which employ this strategy in India in respect of some of the products they market. Park Davis, Unilever ltd. Etc.

There

Example-

EXAMPLES:

Nike has contracted with a number of factories in south-east Asia to produce its athletic footware and it concentrates on marketing. Bata also contracted with a number of cobbler in India to produce its footwear and concentrate on marketing. Mega Toys- a Los Angeles based company contracts with Chinese plants to produce toys and Mega toys concentrates on marketing.

ENTRY MODES CONTRACT MANUFACTURING

Advantages

Disadvantages

The company does not have to commit resource 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 foreign country, it enables the marketer to get started immediately.

In some cases, there will be the loss of potential profits from manufacturing. Less control over the manufacturing process. Contract manufacturing also has the risk of developing potential competitors.