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1M.S Ramaiah School of Advanced Studies - Bangalore
Session 6
nternational Business !ntr"
Mode
Session S#ea$er
%a"ashree &
Asst. Professor
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(ecision of modes of entr"
)o decide the mode of entr" the follo*ing
factor is to +e considered ,-
*nershi# advantages
/ocation advantages
nternationaliation Advantages
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o*nershi# advantages
*nershi# advantages are those +enefits that
the com#an" ma" have +" o*ning the
resources.
)S2 /td. *ned its iron ore mines and
collieries. )his advantage ma$es it the least
cost #roducer of molten iron.
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/ocation advantage
2ertain location factors grant +enefit to the com#an"
*hen the manufacturing facilities are located in the host
countr".
2ustomer needs 3 #references and tastes /ogistic reuirements
2hea# land and acuisition costs
Political sta+ilit"
2hea# la+our
/o* cost of ra* materials
2limatic 2onditions.
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Pressures for lo+al ntegration and
ational (ifferentiation
see C. Bartlett (1986)
Global
Organization
Multinational
Organization
Forces forGlobal
Integration
Forces forNational
Differentiation
Lo
Lo
High
High
TransnationalOrganization
International
Organization
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Advantages and (isadvantages
Strateg" Advantages (isadvantagesInternational transfer distinct com#etencies lac$ local res#onsiveness
lac$ location economies
can7t e8#loit e8#. curve
Multi-domestic customie offerings 9 lac$ location ec"7s
(multi-national) mar$eting can7t e8#loit e8#. curve
cant7 transfer distinct
com#etencies
Global e8#loit e8#erience curve lac$ local res#onsiveness
e8#loit location economies
Transnational e8#loit e8#. 2urve 9 location im#lementation- org7nl
economies3 customie3 glo+al #ro+lems
learning +enefits
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Basic !ntr" (ecisions
;hich mar$ets to enterree mar$et s"stems
?o dramatic u#surge in inflation or #rivate-sector de+t. @nfavora+le
? Politicall" unsta+le develo#ing nations *ith a mi8ed or
command econom" or *here s#eculative financial +u++les
have led to e8cess +orro*ing..
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)iming of !ntr"
Advantages in earl" mar$et entr",? >irst-mover advantage.
? Build sales volume.
? Move do*n e8#erience curve and achieve cost
advantage.
? 2reate s*itching costs.
(isadvantages,
? >irst mover disadvantage -pioneering costs.? 2hanges in government #olic".
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Scale of !ntr"
/arge scale entr"?Strategic Commitments- a decision that has a
long-term im#act and is difficult to reverse.
?Ma" cause rivals to rethin$ mar$et entr".?Ma" lead to indigenous com#etitive res#onse.
Small scale entr",
?)ime to learn a+out mar$et.?Reduces e8#osure ris$.
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!ntr" Modes
!8#orting
)urn$e" Proects
/icensing >ranchising
%oint Centures
;holl" *ned Su+sidiaries Mergers and Acuisitions
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!8#orting
Advantages,
? Avoids cost of esta+lishing manufacturing o#erations.
? Ma" hel# achieve e8#erience curve and location economies.
(isadvantages,
? Ma" com#ete *ith lo*-cost location manufacturers.
? Possi+le high trans#ortation costs.
? )ariff +arriers.
? Possi+le lac$ of control over mar$eting re#s.
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/icensing
n this mode of entr"3 the domesticmanufacturer leases the right to use itsintellectual #ro#ert"3 i.e.3 technolog"3
*or$ methods3 #atents3 co#" rights3 +randnames3 trade mar$s etc. to a manufacturerin a foreign countr" for a fee.
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Basic issues
Boundaries of the agreement
(etermination of Ro"alt"
(etermining rights3 #rivileges and constraints
(is#ute settlement Mechanism
Agreement (uration
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/icensing, Advantages
Reduces develo#ment costs and ris$s ofesta+lishing foreign enter#rise.
/ac$ ca#ital for venture.
@nfamiliar or #oliticall" volatile mar$et. vercomes restrictive entr" +arriers
thers can develo# +usiness
a##lications of intangi+le#ro#ert".
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/icensing agreements reduce the mar$et
o##ortunities
ne #art" can effect the other through
im#ro#er acts.
2ostl" and tedious litigation ma" cro# u#.
Pro+lem of lea$age of the trade secrets of the
licensor.
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1:
/icensing
Advantages,?Reduces costs and ris$s of esta+lishing enter#rise.
?vercomes restrictive investment +arriers.
?thers can develo# +usiness a##lications ofintangi+le #ro#ert".
(isadvantages,?/ac$ of control.
?2ross-+order licensing ma" +e difficult.?2reating a com#etitor
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1=
>ranchising
@nder franchising3 an inde#endent organisation calledthe franchisee o#erates the +usiness under the nameof another com#an" called the franchisor. n such an
arrangement the franchisee #a"s a fee to thefranchisor.
>ranchising is a form of /icensing +ut the >ranchisorcan e8ercise more control over the >ranchisee as
com#ared to that in /icensing.
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>ranchising agreements
>ranchisee has to #a" a fi8ed amount and
ro"alt" +ased on sales.
>ranchisee should agree to adhere to follo*
the franchisor7s reuirements
>ranchisor hel#s the franchisee in
esta+lishing the manufacturing facilities
>ranchisor allo*s the franchisee some degree
of fle8i+ilit".
A 04
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>ranchising
Advantages,
?Reduces costs and ris$ of esta+lishing enter#rise.
(isadvantages,?Ma" #rohi+it movement of #rofits from one
countr" to su##ort o#erations in another countr".
?Dualit" control.
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2ontract manufacturing
2ontract manufacturing is outsourcing entire or
#art of manufacturing o#erations.
!.g., #harmaceuticals3 te8tiles etc
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BP
Business Process utsourcing is the long term
contracting out of non core +usiness #rocesses
to an outside #rovider to hel# achieve increased
shareholder value.WHY BPO
)o ena+le e8ecutives to concentrate on strateg".
)o im#rove #rocesses and save mone"
ncrease organisational ca#a+ilities.
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Management contract
A management contract is an agreement+et*een t*o com#anies *here+" one
com#an" #rovides managerial assistance3technical e8#ertise and s#ecialised services
to the second com#an" for a certain #eriodof time in return for monetar"
com#ensation.
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)urn$e" #roect
A turn$e" #roect is a contract under *hich afirm agrees to full" design3 construct and eui# a
manufacturingE+usinessEservice facilit" and turnthe #roect over to the #urchaser *hen its read"for o#eration3 for a remuneration.
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)urn$e" Proects
Advantages,?2an earn a return on $no*ledge asset.
?/ess ris$" than conventional >(.
(isadvantages,?o long-term interest in the foreign countr".
?Ma" create a com#etitor.
?Selling #rocess technolog" ma" +e sellingcom#etitive advantage as *ell.
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>( *ithout alliances
2om#anies enter the international mar$et
through >( 3 invest their mone"3 esta+lish
manufacturing and mar$eting facilities
through o*nershi# and control.
reenfield strateg"- the term reenfield refers
to starting of the o#erations of a com#an"
from scratch in a foreign mar$et.
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>di *ith strategic alliances
Strategic alliance is a coo#erative andcolla+orative a##roach to achieve the largergoals.
Role of alliances
Man" com#licated issues are solved throughalliances
)he" #rovide the #arties each other7s strengths
Fel#s in develo#ing ne* #roducts *ith theinteraction of ' or more industries
Meet the challenges of technological revolution.
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Managing heav" outla"
Become strong to com#ete *ith a
multinational com#an".
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Modes of >( through alliances are,
Mergers and acuisitions
%oint ventures
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Mergers and Acuisitions
;hat (oes Merger Mean@2)A/ A//A2!S
PR(@2) A//A2!S
MAR&!) A//A2!S
>A2A/ A//A2!S
R!S!AR2F A( (!C!/PM!)
A//A2!S
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%oint Centures
Advantages,?Benefit from local #artner7s $no*ledge.
?Shared costsEris$s *ith #artner.
?Reduced #olitical ris$.
(isadvantages,?Ris$ giving control of technolog" to #artner.
?Ma" not realie e8#erience curve or location
economies?Shared o*nershi# can lead to conflict.
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;holl" *ned Su+sidiar"
Advantages,
?o ris$ of losing technical com#etence to a
com#etitor.
?)ight control of o#erations.
?Realie learning curve and location economies.
(isadvantage,
?Bear full cost and ris$.
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BR!A& @P > A//A2!S
ncom#ati+ilit" of #artners
Access to information
(istri+ution of income
2hanges in +usiness environment
Acuiring the strengths of the #artner
/egal factors
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Advantages and (isadvantages of
!ntr" Modes
Entry Mode Advantage Disadvantage
Exporting Ability to realize location andexperience curve economies
High transport costsTrade barriers
Problems with local marketing
agentsTurnkeycontracts
Ability to earn returns romprocess technology skills incountries where !D" isrestricted
#reating eicient competitors$ack o long%term market
presence
$icensing $ow development costsandrisks $ack o control over technology"nability to realize location and
experience curve economies"nability to engage in
global strategiccoordination
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BMP-MBA 504Advantages and (isadvantages of
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Advantages and (isadvantages of
!ntr" Modes
EntryMode Advantage Disadvantage
!ranchising $ow development costs andrisks
$ack o control over &uality"nability to engage in global strategic
coordination
'ointventures
Access to local partner(sknowledge
)haring development costsand risks
Politically acceptable
$ack o control over technology"nability to engage in global strategic
coordination"nability to realize location and
experience economies
*hollyownedsubsidiaries
Protection o technologyAbility to engage in global
strategic coordinationAbility to realize location and
experience economies
High costs and risks
Table 14.1b
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Selecting an !ntr" Mode
Technological+now%How
Management+now%How
*holly owned subsidiary, except-./ 0enture is structured to reducerisk o loss o technology/
1/ Technology advantage istransitory/
Then licensing or 2oint venture 3+/
!ranchising, subsidiaries4wholly owned or 2oint
venture5/
Pressure or#ost 6eduction
#ombination o exporting andwholly owned subsidiary/
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!ntr" Mode and 2om#etitive
Advantage
Advantage Based on )echnological &no*-Fo*
? !8#orting3 /icensing3 or ;holl"-o*ned su+sidiaries
? !8am#les, Fonda3 ntel
Advantage Based on Management &no*-Fo*? >ranchising3 %oint Centures3 or su+sidiaries
? !8am#les, Mc(onalds3 Marriott
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Strategic Alliances
2oo#erative agreements +et*een #otential or actualcom#etitors.
Advantages,
? >acilitate entr" into mar$et.
? Share fi8ed costs.
? Bring together s$ills and assets that neither com#an" has or
can develo#.
? !sta+lish industr" technolog" standards.
(isadvantage,
? 2om#etitors get lo* cost route to technolog" and mar$ets.
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Alliances Are Po#ular
Figh cost of technolog" develo#ment
2om#an" ma" not have s$ill3 mone" or
#eo#le to go it alone
ood *a" to learn
ood *a" to secure access to foreign
mar$ets Fost countr" ma" reuire some local
o*nershi#
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lo+al Alliances3 ho*ever3 are different
2om#anies oin to attain *orld leadershi#
!ach #artner has significant strength to+ring to the alliance
A true glo+al vision
Relationshi# is horiontal not vertical
;hen com#eting in mar$ets not #art of
alliance3 the" retain their o*n identit"
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Partner Selection
et as much information as #ossi+le on the
#otential #artner
2ollect data from informed third #arties
?former #artners
?investment +an$ers
?former em#lo"ees
et to $no* the #otential #artner +efore
committing
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BMP-MBA 504Structuring the Alliance to Reduce
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Structuring the Alliance to Reduce
##ortunism
3pportunismby partner
reduced by-
Seeking credible
commitments
Agreeing to swap
valuable skills
and technologies
Establishing
contractual
safeguards
Walling off
critical technology
Figure 14.1
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2haracteristics of a lo+al Alliance
Pla"ers are inde#endent #rior to the creatingof the alliance
Pla"ers share
?+enefits of the alliance
?control over o#erations
Pla"ers continue to contri+ute
?technolog"
?#roducts
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BMP-MBA 5042haracteristics of a Strategic Alliance
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2haracteristics of a Strategic Alliance
Independence of
Participants
Shared
Benefits
Ongoing
ontributions
Markets
#ooperat
7eneits#ontrol
Products
Technology
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Pro+lems *ith Strategic Alliances
Fave to give u# some authorit"Econtrol
2ould +e strengthening a future com#etitor
?)echnolog" transfer?Management #ractices
?#erating #rocedures
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