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Strategies to Enter Global Markets
Objectives • Understand different factors
influencing choice of particular mode of entry into a global market
• Describe various modes of entry into international market
Internationalization Decisions
How to Enter?(Entry mode
selection)
When to
Enter?(Timing
of entry)
Where to Enter?(location
)
Basic Entry Decisions
• Which market to enter?- Look at growth potential, profit
potential, size of market- Consumerism grows with large
market size- Growth potential is important for long
term investment- Economic and political factors to be
considered
Contd.• When to Enter those market?-Are we the first ones to enter those
market; FIRST MOVER ADVANTAGE- Grab larger share in market Untapped market Develop brand loyalty
• First mover has disadvantages:-risk about customer reaction-pioneering cost-competitors are aware of market
conditions-disadvantage of first mover becomes
advantage for the competitor
Different modes of entry to IB
EXPORTING
LICENSING/ FRANCHISING
CONTRACT MANUFACTURING
MANAGEMENT CONTRACTING
TURNKEY CONTRACTS
MERGERS AND ACQUITIONS
STRATEGIC ALLIANCE
FOREIGN DIRECT INVESTMENT(WITH ALLIANCES)
EXPORTING
DIRECT EXPORTS INDIRECT EXPORTS
EXPORTING• It is the marketing and direct sale of
domestically produced goods in another country.
• It is a traditional and most common mode of entry.
• Small firms with limited financial and other resources find exports most suitable form of expansion
DIRECT EXPORTING• It is selling the products in a foreign
country directly through its distribution arrangements or through a host country’s company.
• Firm is directly involved in marketing its products in foreign markets.
• To implement direct exporting a firm must have representations in foreign market
direct exporting includes:
• Market Contact• Market Research • Physical Distribution• Export documentation• Pricing
INDIRECT EXPORTING
• Indirect Exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Eg. Various publishers in India sell their books in India which in turn export to various foreign countries.
Exporting ADVANTAGES DISADVANTAGES
Less costly than setting up production abroad
Countries which ban certain products to be imported are discouraging exports
Exporting proves to be very profitable when there is a sudden decline of the product in home country
Does not lead to profits always
LICENSING • In this mode the domestic
manufacturer leases the right to use its intellectual property i.e technology, work methods, patents, copyright, brand names, trade marks etc to a manufacturer in a foreign country for a fee.
• Domestic Manufacturer- Licensor• Manufacturer in Foreign country -
Licensee
LICENSING • Licensing may be attractive when
host countries restrict imports or FDI or when the market is small.
Exclusive License
Cross LicenseNon- Exclusive License
• Exclusive License- arrangement provides exclusive rights to produce and market an intangible property in specific geographic region.
• Non- Exclusive License- does not grant a firm sole access to market. Other companies of same region may be granted license to use technical skills
• Cross Licensing-give one party a licence to use (patented or copyright material) in return for a similar licence.
LICENSINGLICENSOR
Leases the right to use intellectual
property
LICENSEEUses property to
produce products for sale in his country
LICENSEEPays royalty to
licensor
LICENSORReceiver of
royalty
LICENSING ADVANTAGES DISADVANTAGES
It carries low investment on part of licensor
Licensing agreements reduce the market opportunities for both licensor and licensee
It carries low financial risk to licensor Both parties have responsibilities to maintain product quality and promoting product.
Licensor can investigate foreign market without much efforts
Costly and tedious litigation may crop up
Licensee gets the benefit with less investment on R&D.
Problem of leakage of trade secrets of the licensor. Licensee may develop his reputation.
FRANCHISING• Franchising is a form of licensing.
Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor.
• Franchisor can exercise more control over franchisee than licensing.
FRANCHISING• Under this agreement franchisee
pays a fee to the franchisor. Franchisor provides following services to the franchisee:
- Trademarks- Operating systems- Product reputations
FRANCHISINGADVANTAGES DISADVANTAGES
Franchisor can enter global markets with low investment and low risks
Difficult to control international franchisee.
Franchisor can get the information regarding markets, culture, customs and environment of host country.
Franchising agents reduce the market opportunities for both franchisor and franchisee.
Franchisee gets benefits R&D with low cost
There is scope for misunderstanding between the parties
Franchisee escapes risk of product failure Problem of leakage of trade secrets
CONTRACT MANUFACTURING
• It is outsourcing entire or part of manufacturing operations
Example- nike has contracted with a no. Of factories in South East Asia to produce its athletic footwear and it concentrates on marketing.
CONTRACT MANUFACTURING
ADVANATGES DISADVANTAGES
International company gets the locational benefits by host country’s production
Poor working conditions in host country companies affect the company image.
Small and medium industrial units in host country can also develop as most of production activities take in these units.
Host country companies may not strictly adhere to production design, quality, design problems
It reduces cost of production as host country companies with their relatives cost advantage produce at low cost.
MANAGEMENT CONTRACTS
• It is an agreement between 2 companies, whereby one company provides managerial assistance, technical expertise and specialised services to the second company of the agreement for a certain agreed period in return for monetary compensation.
MANAGEMENT CONTRACTS
• According to Kotler, Management contracting is a low risk method of getting into a foreign market and it starts yielding income right from the beginning. Such a contracted agreement becomes fruitful if contracting firm is given an option to purchase some shares in managed company within stated period.
MANAGEMENT CONTRACTS
• Monetary Compensation may be- -a flat fee- Percentage over sales- Performance bonus based on
profitability, sales growth, production- Example- Hotel Industry
MANAGEMENT CONTRACTS
ADVANATGES DISADVANATGES
Foreign company earns additional income without any additional investment, risks
Sometimes the companies allow the companies in the host country even to use their trade marks and brand name. Host country’s companies spoil the brand name if they do not keep up the quality of product service.
Helps to enter other business areas in host country
Host country companies may leak secrets of technology
Countries with abundant skilled and semi-skilled labor like India have privilege of producing products at desired time in international markets
Over dependence on contracting firm and loss of control on operations
Developing country is able to utilize specialised expertise in different areas in their economy.
There may be misunderstanding between foreign managers and local managers often affecting productivity.
TURNKEY PROJECT• “Turning” the key when plant is fully
operational. • It is a contract under which a firm
agrees to fully design, construct and equip a manufacturing/ business/service facility and turn the project over to purchaser when it is ready for operation for a remuneration.
TURNKEY PROJECT• In this agreement seller provides a
ready to use facility to the buyer in a foreign country.
• In other words, seller firm constructs a facility, starts operations, trains local personnel, and then transfers the facility to foreign owner.
TURNKEY PROJECT• Forms of remuneration- - A fixed price(firm plans to implement
project below this price)- Payment on cost+basis (total
cost+profit)
TURNKEY PROJECT• Recent approach to turnkey projects
is BOT(Build-Operate-Transfer)• Mega projects like International
turnkey project include nuclear power plants, air ports, oil refinery, national highways, railways lines.
• They are large and multi year projects
TURNKEY PROJECTADVANTAGES DISADVANATGES
Helps firm in specialising key competencies.
A rival firm is created for the firm entering into project with a foreign country firm.
For big infrastructural projects like railways airports, dams, etc host country is in a position to obtain top class design.
These deals are short term role of firm gets over once it hands over the (key) technology to foreign enterprise
JOINT VENTURE• 2 or more firms join together to
create a new business entity which is legally separate from its parent company
• In this form of entry a firm enters into a partnership agreement with one or more local companies in the target country or with firms either from third country or home country.
JOINT VENTURE• Partnership agreement includes: Sharing of equityMarket know howTechnology skillsAn imp feature of this form is contracting
firm maintain their separate and independent legal entities. This is welcomed by countries where restrictions on investment are imposed
JOINT VENTUREADVANTAGES DISADVANTAGES
Firm with limited resources can also enter foreign market through joint venture
There could be conflict among corporate objectives of partners
Less political risk Cultural differences can lead to management problems
Share the cost of administration and also risk of failure
Staff might be overburdened with JV
If the firm has entered into a joint venture with local partner, then it has an advantage of getting first hand information about culture, language, political, competitive conditions.
Freedom to act independently is missing in JV. Problems of co-ordination may arise
MERGERS AND ACQUISITIONS
• When 2 firms completely lose their individual identity and amalgamate into a new firm representing the interests of the 2, it is known as ”merger”
• When a firm acquires or purchases the other firm, acquisition is said to have taken place. In a cross border acquisition, management control of assets and operations of a domestic company to a foreign company takes place.
MERGERS AND ACQUISITIONS
ADVANTAGES DISADVANTAGES
Benefits from economies of scale Acquiring form should be in same field as old firm, otherwise on account of lack of experience and expertise the business of acquired firm may suffer.
Capturing a large market Loss of talented managerial staff can affect performance of acquired unit thus lead to losses
Tapping the underutilised resources Acquiring firm may have to overpay for assets of acquired firm
Reducing financial risk Sometimes, new firm does not weigh pros and cons of acquired firm and later realise that more than potential benefits there are losses from acquired firm.
Reduced risk of competition
Reduced cost of capital
STRATEGIC ALLIANCE
• Strategic Alliance b/w 2 countries means that they have mutually agreed to contribute their capabilities and strengths so that alliance could be a strong competitive firm in the world.
Motive behind strategic alliance
• Join hands with prospective or actual competitors
• Increasing size of market• Develop new technology• Achieve economies of scale• Synergetic effects in the partner
firms
STRATEGIC ALLIANCE
ADVANTAGES DISADVANTAGES
Potential competitors can be eliminated Sharing resources may breed future competitors for firms
No loss of individual identity for participating firms belonging to different countries
Different goals of firms may lead to conflicts
Individual risks of running the firms alone gets reducedParticipating firms agree to share the investment costFirms forming strategic alliance have access to each other’s tangible and intangible resources
COUNTER-TRADE• In this mode of entry, firms do away
with currency transactions. On the contrary, they export certain items in return of items imported (of same value) from the same country.
COUNTER-TRADEIt can be any of the following forms: • Barter- goods exchanged for goods• Buyback- supplier of plant & machinery agrees
to buy goods manufactured with that P&M• Compensation deal- part payment in cash and
rest in products• Counter purchase- seller initially receives full
payment in cash, but agrees to spend an amount in that country within the stipulated time period.
COUNTER-TRADEADVANTAGES DISADVANTAGES
Developing countries resort to this mode of entry due to foreign exchange problems faced by them.
Development of export market is affected
Suitable for firms need to fully export their plant capabilities and want to enter difficult foreign markets
Bilateralism is given importance instead of multilateralism
Preferred by many firms to dispose off their obsolete products and also increase sale of capital goods
FOREIGN DIRECT INVESTMENT(FDI)
• According to IMF, FDI is defined as investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor.
• It is a long term international capital movement, made for the purpose of productive activity with the intention of managerial control of foreign firm
FOREIGN DIRECT INVESTMENT(FDI)
Motives for FDI• Managerial skill• Technical knowledge• Capital and technology
Thank you