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 long-run profit potential for firmsSize of market Purchasing power (present

wealth)Future wealth

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 cost & risks – rank marketsFuture economic growth ratesFree market system & country’s

capacity for growthFavorable = 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 Mercedes- Benz 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 marketSuitability of product for market Nature of indigenous

competitionNot widely available & satisfies

an unmet needGreater 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

First mover advantageAbility 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

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 & effort in learning the rules

Mistakes due to ignoranceLiability of being a foreignerCosts of promoting &

establishing a product – educating customers (KFC in China -> benefit to McDonald’s)

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 country’s 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 country’s 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 TRANSFERSI T are selling of products by a

company to its affiliated company in host country.

Selling of products by Hindustan Lever in India to Unilever in USA. This transaction is treated as exports in India and imports in USA.

ENTRY MODES - EXPORTING

Advantages

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)

Disadvantages

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.

Here the manufacturer in the domestic country is called ‘licensor’ and the manufactuer in the foreign country is called ‘licensee’.

BASIC ISSUES IN INTERNATIONAL LICENSING

Companies should consider various factors in deciding negotiation. Each international licensing is unique and has to be decided separately.

However, there are certain common factory which affect most of the international licesnses.

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 of Royalty

Determining Rights, Privileges and Constraints

Dispute Settlement Mechanism

Agreement Duration

ENTRY MODE - LICENSINGAdvantages

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

Disadvantages

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 is a form of licensing.

The franchisor can exercise more control over the franchised compared to that in licensing.

International franchising is growing at a fast rate.

UNDER FRANCHISING:

“an independent organization called the franchisee operates the business under the name of another company called the franchisor.”

Under this agreement the franchisee pays a fee to the franchisor.

The franchisor provided the following services to the franchisee:

Trade marksOperating systemProduct reputationsContinuous 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 - FRANCHISINGAdvantages

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 franchisee’s revenues

Firm relieved of many costs & risks of opening new market.

Disadvantages

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.

Joint Ventures are established as corporations and owned by the funding partners in the predetermined proportions.

Joint ventures are shared ownerships.

Various environmental factors like social, technological, economic and political encourage the formation of joint ventures.

Joint 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 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.

American Motor Corporation entered into a joint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles.

ENTRY MODE – JOINT VENTURESAdvantages

Typically 50/50 with contributed team of managers to share operating control

Firm benefits from local partner’s 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

Disadvantages

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.

In view of frequently changing economic, social and political conditions globally, these wholly-owned subsidiaries are highly risk averse.

A 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).

As manufacturing is established abroad through direct investment, parts and components are often exported from the home country.

ENTRY MODE – SUBSIDIARY Advantages

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

Disadvantages

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.

A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business.

Alternatively, the domestic company may purchase the foreign company and acquires its ownership and control.

Domestic business selects this mode of entering international business as it provided immediate access to international manufacturing facilities and marketing network.

Otherwise, the domestic company faces serious problems in gaining access to international market.

ENTRY MODE – ACQUISITION Advantages

The company immediately gets the ownership and control over the acquired firm’s factories, employees, technology, brand names and distribution networks.

The company can formulate international strategy and generate more revenues.

Disadvantages

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

A 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.

Strategic partnerships may emerge in many forms including research and development consortiums, co-production alliances, co-marketing partnerships, cross-licensing and cross-equity arrangements.

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.

Strategic alliance is also sometimes used as a market entry strategy.

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.

There are a number of multinationals and affiliates of multinationals which employ this strategy in India in respect of some of the products they market.

Example- Park Davis, Unilever ltd. Etc.

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

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.

Disadvantages

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.