International Entry Modes & Barriers

INTERNATIONAL ENTRY MODES & BARRIERS

Presented By:SHILPI JAIN

Roll No. 0511143908MBA IIIrd Sem

BPIBS

THIS PRESENTATION WILL COVER THE FOLLOWING:

• Criteria for country selection• International market analysis• Case study on going global• Various market entry modes• Comaprison of various entry modes• Case Study on Disney• Barriers to entry

INTRODUCTION

• In today's globalizing world, firms are increasing, looking towards other regions of the world to trade in.

• What are the steps taken by the executives of these firms before deciding on which market to enter?

• How do they make sure they make their journey a successful one?

Introduction contd.

• The decision requires an analysis of the aspects of the foreign market.

- Whether to go abroad - Which markets to enter - How to enter those markets - Choice of marketing program -Marketing organization

Introduction Contd.

Criteria for Country selection :1. Country/market Attractiveness in terms of the

following: o Market size o Market growth and need potential in terms of demand

2. Company strength in terms of brand and accessibility

3. When the risk e.g. political is marginal compared to opportunities

4. Customer response5. Competitive situation

Introduction contd.

• A firm becomes proactive i.e. pulled by the potentials and advantages in the foreign market due to the following reasons:

1. The firms specific advantages in terms of profit2. The advantage of having a unique brand3. When a firm possesses technological advantages4. The availability of resources in the foreign countries5. Economies of scale6. Economic and political factors

Introduction Contd.

• A firm becomes reactive i.e. pushed by bad domestic markets when the following is evident:

1. The pressure of domestic competition2. Poor domestic market due to stagnant

or declining sales figures3. Saturated domestic markets4. Overproduction

INTERNATIONAL MARKET ANALYSIS

• Your company has to develop a unique design based upon its specific goals and more importantly, its budget and existing capacity.

• “you cannot do an analysis, if you have nothing to analyze”

• The bulk of the analysis task is in gathering the information first and then understanding how this information is relevant to your company's specific goals and its circumstances.

International Market Analysis Contd.

• Choosing market to analyze- can consumers and/or end users afford your

product or service? or- does the proposed business venture have any

real potential for success?

International Market Analysis Contd.• “foreign vacation syndrome“ – two types :- Type# 1 is when an executive goes on vacation

and notices that his/her product is not being widely sold in the foreign country.

- Type# 2 is when an executive falls in love with a particular country while on vacation and then decides to try to make contacts with locals so that he/she can anticipate doing business in this country with an eye for using this as a way to write off trips for business purposes that are really for pleasure.


• Type# 1 assumes that nobody locally is smart enough to recognize a demand for a particular product and be successful at importing and selling it.

1) this assumes that you are smarter than the local business people who live there and know the market dynamics and

2) it furthermore assumes that there is in fact a demand for your product or service.


• Type# 2 is bad because it violates simple business principles at best.

• it could lead to illegal business activities that could have very serious consequences.


• "foreign contact syndrome“• it assumes that the contact has the capability

to perform specific tasks that are essential to any international business transaction.

• No business card - - >> “no problem”!• They fool executives


• Gathering InformationRelevant topics and sources of

information:- Domestic Government Agencies- The largest compiler of data about

foreign markets in our country is Ministry of Trade and Commerce and FICCI.


• Private Agencies and Other Private Sources

- collects and disseminates market analysis and other important data about foreign markets

- groups as industry & trade organizations, local chambers of commerce and other business development groups provide a wealth of information about foreign markets


• Communicating with International Business Professionals

Following is a brief explanation of some of the specialists that you might encounter in the analysis phase of going global:

International trade intermediary: trade intermediaries perform their function as part of a global trading company

Export management company - specialized global trading company


International or foreign freight forwarder: responsible for actually assisting your company to ship its goods from the factory or warehouse to its foreign destination

- specialists in trade laws and understand such things as quotas, restrictions, phyto-sanitary regulations, packing requirements and hidden trade barriers


International freight consolidator: buy large of amounts of cargo space at the premium rate, which is lower than that for small shipments

International accounting firms: A stalwart for multinational corporations who face different laws and tax issues in different jurisdictions. E.g. PriceWaterhouseCoopers


International law firms: You should consult an attorney for any global transaction not covered by a letter of credit or documentary draft.

- Licensing technology, selling franchises, entering strategic alliances, any foreign real estate transaction or trying to raise capital funds in foreign markets would all be examples of matters best handled by a qualified international law firm.


International insurance companies: Most import-export transactions require cargo insurance and it is not optional

- Many companies typically want some type of credit insurance in order to be able to sell to foreign clients on open account, which is often considered more favorable.


International banks: primary means by which most import-export transactions are settled, usually by way of letter of credit or documentary draft.

- International banks also handle certain types of foreign exchange transactions and help companies to manage their exposure to risk that the value of a transaction will change unexpectedly.


• Assessing Political Risk- it may be possible to cover your financial

risk in terms of money, political risk has far reaching affects that go beyond any financial consequences.

- will have a demoralizing effect on the psyche of all employees in a company


• The Process of Analysis- OK. You've spent time, money and resources gathering

up every bit of information that you could find about several foreign markets.

• Essential Factors to Consider:- Size of the market- Product/service localization issues- Business infrastructure


- Local business customs- Political risk- Banking and financial institutions• Analyzing a foreign market is only one

aspect of making the final decision about going global.

• How much weight is given to any one factor is very subjective and will vary from one company to another

CASE STUDY : McDONALD’S GOES GLOBAL

• By the mid 1980’s, McDonald’s found it next to impossible to continue its growth within the U.S. domestic market

• Because :- the U.S. market had become saturated with

competition- the U.S. domestic market was simply too small, in

itself, to sustain consistent growth for the burgeoning fast-food industry

Case Study (1): McDonald’s Goes Global, Contd.

• The new McDonald’s strategy included an overseas component which began cautiously, at first, but then accelerated significantly

• McDonald’s found that its operations had to be adjusted to meet the variances of different markets

• In the U.S., employees treat their McDonald’s job as temporary, whereas employees in Russia wish to work for McDonald’s for the rest of their lives

Case Study (1) : McDonald’s Goes Global• Pricing is also a problem, as the purchasing

price of a ‘Big Mac’ depends on the exchange rate between the local currency and the U.S. dollar

• The lesson learned by McDonald’s is that dependence on a single domestic market can be overcome by overseas ventures, but not without a considerable amount of research into the changes that must be made in each culture to make the foreign operation a success.

FOREIGN MARKET ENTRY MODES

• A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market

• Expansion into foreign markets can be achieved via the following four mechanisms:

- The Internet - Exporting- Licensing - Joint Venture- Direct Investment - International Agents & International Distributors- Strategic Alliances

Foreign Market Entry Modes Contd.

The Internet- The Internet is a new channel for some organizations

and the sole channel for a large number of innovative new organizations

- The eMarketing space consists of new Internet companies that have emerged as the Internet has developed, as well as those pre-existing companies that now employ eMarketing approaches as part of their overall marketing plan


• New Internet Companies:- New online retail brand e.g. Amazon,

Lastminute.com- Online Auction e.g. eBay- New online manufacturer brand e.g.

Dell.com


• Pre-existing companies that have adopted eMarketing

- Banking and financial Services e.g. HSBC Bank- Agents e.g. Avon Representatives, Oriflame- Franchises e.g. KFC

Foreign Market Entry Modes Contd. Exporting- Exporting is the marketing and direct sale

of domestically-produced goods in another country

- There are direct and indirect approaches to exporting to other nations

- Direct exporting is straightforward. Essentially the organization makes a commitment to market overseas on its own behalf


- if you were to employ a home country agency (i.e. an exporting company from your country - which handles exporting on your behalf) to get your product into an overseas market then you would be exporting indirectly

- Examples of indirect exporting include:• Piggybacking whereby your new product uses the

existing distribution and logistics of another business.• Export Management Houses (EMHs) that act as a bolt on

export department for your company. They offer a whole range of bespoke or a la carte services to exporting organizations.

Foreign Market Entry Modes Contd.• Trading companies were started when

some nations decided that they wished to have overseas colonies. They date back to an imperialist past that some nations might prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as mainstream businesses that use traditional business relationships as part of their competitive advantage.


Licensing• Licensing essentially permits a company in the target

country to use the property of the licensor• Such property usually is intangible• The licensee pays a fee in exchange for the rights to use

the intangible property and possibly for technical assistance.

• Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI


• Licensing includes franchising, Turnkey contracts and contract manufacturing

• Franchising involves the organization (franchiser) providing branding, concepts, expertise, and infact most facets that are needed to operate in an overseas market, to the franchisee. Management tends to be controlled by the franchiser. Examples include Dominos Pizza, Coffee Republic and McDonald’s.


• Turnkey contracts are major strategies to build large plants.

• They often include the training and development of key employees where skills are sparse - for example, Toyota’s car plant in Adapazari, Turkey.

• You would not own the plant once it is handed over.

Foreign Market Entry Modes Contd.• Contract manufacturing firm is that which

manufactures components or products for another "hiring" firm. It is a form of outsourcing

• The practice of utilizing contract manufacturing relies on the manufacturer's ability to drive down the cost of production through economies of scale

• It also allows the hiring company to obtain the needed components or products without needing to own and operate a factory.


Joint Venture• There are five common objectives in a joint venture: - market entry- risk/reward sharing- technology sharing- joint product development- conforming to government regulations


• Such alliances often are favorable when:- The partners' strategic goals converge

while their competitive goals diverge;- The partners' size, market power, and

resources are small compared to the industry leaders; and

- Partners' are able to learn from one another while limiting access to their own proprietary skills.


• Potential problems include:- Conflict over asymmetric new investments- Mistrust over proprietary knowledge- Performance ambiguity - how to split the pie- Lack of parent firm support- Cultural clashes- If, how, and when to terminate the relationship


Foreign Direct Investment/ Overseas Manufacture / International Sales Subsidiary

• A business may decide that none of the other options are as viable as actually owning an overseas manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas market


• involves the transfer of resources including capital, technology, and personnel

• through the acquisition of an existing entity or the establishment of a new enterprise

• The key benefit is that your business becomes localized - you manufacture for customers in the market in which you are trading

• downside is that you take on the risk associated with the local domestic market


International Agents and International Distributors

• agents are individuals or organizations that are contracted to your business, and market on your behalf in a particular country

• They rarely take ownership of products, and more commonly take a commission on goods sold.

• Agents usually represent more than one organization


• Agents are a low-cost, but low-control option• They tend to be expensive to recruit, retain

and train• Distributors are similar to agents, with the

main difference that distributors take ownership of the goods

Foreign Market Entry Modes Contd. Strategic Alliance• A strategic alliance is a term that

describes a whole series of different relationships between companies that market internationally

• Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain independent and separate.


• There are many examples including:- Shared manufacturing e.g. Toyota Ayago is also marketed

as a Citroen and a Peugeot- Research and Development (R&D) arrangements- Distribution alliances e.g. iPhone was initially marketed

by O2 in the United Kingdom- Marketing agreements• Several streams of thought are discernible in the

discussion of cooperative or collective strategy

Foreign Market Entry Modes Contd.• alliance has been considered as a strategy

of behavior contrasted with competitive strategy

• “if you can’t beat ‘em, join ‘em.”• alliance has been posited as a systematic

response to promote areas of common interest between two firms

• alliance has been theorized as a particular value system with emphasis on humanism and fairness.


• Examples:- SAIL and TATA Steel: SAIL signed an agreement with Tata

steel for joint development of coal blocks- Xerox and Fuji: These two multinational giants, located in

U.S. and Japan, respectively, joined hands to explore new markets in Europe and in Pacific Rim countries.

- AT&T, IBM, Motorola, and Loral: A giant alliance between AT&T, IBM, Motorola and Loral was formed to develop an advanced computer chip manufacturing technology

CASE STUDY: THE CASE OF EURODISNEY

• Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project

• Walt Disney Co. faced the challenge of building a theme park in Europe

• Disney's mode of entry in Japan had been licensing• the firm chose direct investment in its European theme

park, owning 49% with the remaining 51% held publicly• another important element in Disney's decision was

exactly where in Europe to locate

Case Study: The case of EuroDisney

• There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location.

• if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture

BARRIERS TO INTERNATIONAL BUSINESS

Barriers To International Trade Contd.

Social and Cultural Diffrences- Companies must, for example, take

language factors into account when making adjustments in packaging, signs, and logos

- Pepsi-Cola is exactly the same product whether it is sold in Seattle or Moscow, except for the lettering on the bottle

- Less universal products, however, face a variety of conditions that require them to adjust their practices

Barriers to International Trade Contd.

• In Thailand, for example, Kentucky Fried Chicken (KFC) has adjusted its menus, ingredients, and hours of operation to suit Thai culture

• A wide range of subtle value differences can also affect international operations

• For example, many Europeans shop daily. To U.S. consumers accustomed to weekly supermarket trips, the European pattern may seem like a waste of time

• For many Europeans, however, shopping not only involves buying food but is also an outlet for meeting friends and exchanging political views.

Barriers To International Trade Contd.• Consider the implications of this cultural

difference for U.S. firms selling food products in European markets

• First, large American supermarkets are not the norm in many parts of Europe

• Second, people who shop daily do not need large refrigerators and freezers


Economic Differences• Although cultural differences are often subtle, economic

differences can be fairly pronounced• In dealing with mixed economies like those of France and

Sweden, firms must be aware of when, and to what extent, the government is involved in a given industry

• The French government, for instance, is heavily involved in all aspects of airplane design and manufacturing

• The impact of economic differences can be even greater in planned economies like China and Vietnam.

Barriers To International Trade Contd. Legal And Political Differences• can set conditions for doing business within

their borders or even prohibit doing business altogether

• can control the flow of capital and use tax legislation to either discourage or encourage international activity in a given industry

• more common legal and political issues in international business are: quotas, tariffs, and subsidies; local content laws; and business practice laws.


Quotas, Tariffs, and Subsidies- A quota restricts the number of products of a certain

type that can be imported into a country- By reducing supply, the quota raises the prices of those

imports- For example, Belgian ice cream makers can ship no more

than 922,315 kilograms of ice cream to the United States each year

- Similarly, Canada can ship no more than 14.7 billion board feet of softwood timber per year to the United States.

Barriers To International Trade Contd.• Quotas are often determined by treaties• better terms are often given to friendly

trading partners, and quotas are typically adjusted to protect domestic producers

• ultimate form of quota is an embargo• a government order forbidding exportation

and/or importation of a particular product or even all the products from a particular country

• Many nations control bacteria and disease by banning certain agricultural products


• The United States has embargoes against Cuba, Iraq, Libya, and Iran

• U.S. firms are forbidden from investing in these countries, and products from these countries cannot legally be sold on American markets

Barriers To International Trade Contd.• A tariff is a tax on imported products• Tariffs directly affect prices by raising the

price of imports• Consumers pay not only for the products

but also for tariff fees• Two types-- Revenue tariffs are imposed strictly to raise

money for governments- Most tariffs, however, are protectionist

tariffs, meant to discourage the import of particular products


• For example:- firms that import ironing-board covers into the United

States pay a tariff of seven percent of the price of the product

- Firms that import women's athletic shoes pay a flat rate of 90 cents per pair plus 20 percent of the price of the shoes

• A subsidy is a government payment to help a domestic business compete with foreign firms

Barriers To International Trade Contd.• They lower prices of domestic goods rather

than raise prices of foreign goods• Many European governments subsidize

farmers to help them compete with U.S. grain imports.

• Quotas and tariffs are imposed for a variety of reasons

• The U.S. government aids domestic automakers by restricting the number of Japanese cars that can be imported into this country


• National security concerns have prompted the United States to limit the extent to which certain forms of technology can be exported to other countries (for example, computer and nuclear technology to China)

• Italy imposes high tariffs on imported electronic goods to protect domestic firms

• A Sony Walkman costs almost $150 in Italy, and CD players are prohibitively expensive

Barriers To International Trade Contd. Protectionism Debate• the practice of protecting domestic

business at the expense of free market competition

• Supporters argue that tariffs and quotas protect domestic firms and jobs, therefore, sheltering new industries until they are able to compete internationally

• A nation, they argue, must be able to produce the goods needed for its survival in the event of war


• the U.S. government requires the U.S. Air Force to buy all its planes from U.S. manufacturers

• Critics cite protectionism as a source of friction between nations. They also charge that it drives up prices by reducing competition

• Protectionism can sometimes take on almost comic proportions


• Neither Europe nor the United States grows bananas. A disagreement flared up when the EU imposed a quota on bananas imported from Latin America, a market dominated by two large U.S. firms, Chiquita and Dole in order to help firms based in current and former European colonies in the Caribbean. To retaliate, the United States imposed a 100-percent tariff on certain luxury products imported from Europe, including Louis Vuitton handbags, Scottish cashmere sweaters, and Parma ham.


Local Content Laws• requirements that products sold in a particular

country be at least partly made there• In this way, some of the profits from doing business

in a foreign country stay there rather than flowing out to another nation

• In Mexico, for instance, Radio Shack de Mexico is a joint venture owned by Tandy Corporation (49 percent) and Mexico's Grupo Gigante (51 percent)

Barriers To International Trade Contd.• Both China and India currently require that

a foreign firm wishing to establish a joint venture with a local firm must hold less than 50 percent ownership in the partnership, with the local partner having the controlling ownership stake


Business Practice Laws• Many businesses that enter new markets encounter a host of

problems in complying with stringent, and often changing, regulations and other bureaucratic obstacles

• as part of its entry strategy into Germany, Wal-Mart has had to buy existing retailers rather than open new ones

• Why? Because the German government is not currently issuing new licenses to sell food products

• the firm had to discontinue its standard practice of promising to refund the price difference on any item sold for fewer elsewhere: in Germany, the practice is illegal


• Sometimes, a legal, even an accepted business practice in one country is illegal in another

• In some South American countries, for example, it is sometimes legal to bribe business and government officials

THANKS FOR LISTENING TO ME PATIENTLY!

Presented By:SHILPI JAIN

Roll No. 0511143908MBA IIIrd Sem

BPIBS

ANY QUESTIONS??

Shilpi

International Entry Modes & Barriers

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