Entering International Markets Through Exports and Licensing

Agreements

Session 3

Benefits of Exporting Exports increase sales and income.

If you don’t export, you're competing only for a larger slice of the domestic pie. With exporting, you expand the pie - the entire world is your market

Exports diversify market risk; offset lags in domestic demand Exports can help offset sales slow-downs during recessions

and seasonal changes. When the domestic economy stagnates, the economy in other countries may be growing

Exports extend product life cycles As technology advances and tastes change, many products

become obsolete or lose their appeal, particularly in highly industrialized markets

Exports use idle capacity – economies of scale Increased exports put idle production capacity to work,

often with the same equipment, staff and capital investment

Indicators of export potential and success

Estimating Industry Market Potentials Where are comparable products mostly exported?

Look for the largest and fastest growing export destinations for the product over the past several years.

Which countries are mostly importing comparable products? Look for countries with the largest and fastest growing imports of

the product over the past several years. Where would comparable products be most competitive?

Look for high market share countries with limited competition from local producers.

Where are comparable products most welcome and easiest to sell? Look for countries with high receptivity to the product and no

significant market barriers. Which markets do the experts consider most promising?

Look for countries recommended as "Best-Prospect" markets for comparable products.

Market Potential Matrix

Country / Criteria

1 2 3 4 5 6 7 8 9 10

County 1

County 2

County 3

County 4

County 5

County 6

Criteria:1. Largest export markets, latest year 2. Fastest growing export markets, past 3 yrs 3. Fastest growing export markets, latest year 4. Largest importing countries, latest year 5. Fastest growing importing countries, past 3 yrs 6. Fastest growing importing countries, latest year 7. Strong share of import market, latest year 8. Limited competition from local producers 9. High receptivity to products from your country 10. No significant market barriers

Indirect and Direct Export Channels

International Trading

CompanyExport

Merchant

Resident Foreign Buyer

Allied Manufacturer

Export Management

CompanyForeign Agent /

DistributorForeign Branch /

Subsidiary

Wholesaler

Retailer

Household

Consumer

Industrial Distribut

or

Industrial User /

Government

Manufacturer

Home country Foreign country

Exporting as a learning experience Indirect exporting

No incremental investment in fixed capital Low start-up costs Few risks Profits on current sales Exploratory, experimental behaviour to obtain knowledge

about foreign markets and ability to compete in them

Knowledge of Foreign Country / Market

Time

Perceived foreign risks as compared to

domestic markets

Adding products to the product line

Entering new target markets

Shifting to direct exporting

Direct exporting: Advantages and Disadvantages

Advantages: Partial or full control over foreign marketing plan (distribution,

pricing, promotion, product services, etc.) Concentration of marketing effort on the manufacturer’s product

line More and quicker information feedback from the target market,

which can improve marketing effort (e.g. Product adaptation or more responsive pricing)

Better protection of trademarks, patents, goodwill, and other intangible property

Disadvantages Higher startup costs Greater information requirements Higher risks

Determining the Direct Export Channel

(1) Performance specifications What the channel is intended to accomplish

(2) Channel type Which channel (or channel mix) is optimum to by

matching performance specifications against alternative channel systems, with due regard to paid costs

(3) Channel members Criteria to guide selection on individual channel

members

Determining Performance Specifications What geographical market coverage do we want

in a target country? How intensive should our market coverage be? What specific selling and promotion efforts do we

want from channel agencies? What physical supply services (e.g. volume and

location of inventories and delivery systems) do we want from channel agencies?

What pre- and post-purchase services (credit, installation, maintenance, and repair) do we want from channel agencies?

Intensity of market coverage and its implications

Determining the Channel Type (1) Branch/subsidiary vs. Agency/Distributor

Control – principal appeal in favour of branch/subsidiary. Possibility to control full marketing channel (producer-end

buyer). Company can develop a channel that more closely meet

performance specifications

Costs – principal appeal in favour of agency/distributor, In case of agent/distributor channel type costs are mostly

variable costs (commissions and mark-ups) tied to sales volume, whereas substantial part of branch/subsidiary costs are fixed costs (office and storage facilities, permanent working capital)

At which level of sales (if any) in the target market will branch/subsidiary unit sales costs fall below agent/distributor

unit sales costs?

Determining the Channel Type (2)

Choosing a Foreign Agent/Distributor

The Distributor Profile

Lists all the attributes that a company would like to get in its distributor for a foreign market Trading areas covered Lines handled Size of firm Experience with

manufacturer’s or similar product line

Sales organization and quality of sales force

Physical facilities Willingness to carry

inventories After-sales servicing capability Knowledge / use of promotion

Cost of operations Reputation with suppliers,

customers, banks Record of sales performance Financial strength Overall experience Relations with government Knowledge of English or other

relevant languages Knowledge of business

methods in manufacturer’s country

Willingness to cooperate with manufacturer

The Distributor Profile: Fundamental qualities

Experience A representative with a solid track record as an

agent or distributor; expertise in the product

area; and strong connections in the user

community

CapabilityA representative who can market and support the products in the way they require (e.g., promote the

product, train users, install and service

equipment)

Motivation A representative

who is enthusiastic

about the product and able and

willing to give it priority

Loyalty A representative who would not

desert you for a competitor or

represent a firm with a competing

product

Honesty A representative

with a good reputation in the

industry and good bank and trade

references

Entering Foreign Markets through Licensing and Other Contractual

Arrangements

International Licensing: Definition International licensing includes a variety of

contractual arrangements whereby domestic companies (licensors) make available their intangible assets (patents, trade secrets, know-how, trademarks, and company name) to foreign companies (licensees) in return for royalties and/or other forms of payment.

Commonly, the transfer of these intangible assets or property rights is accompanied by technical services to ensure the proper use of the assets.

Reasons for licensing abroad To penetrate foreign market To get incremental income on technology that has

already been written off against domestic sales To acquire the research output of a foreign firm in

return for that of a domestic company (“cross-licensing”)

To establish legal ownership of company’s patents and trademarks in order to facilitate the repatriation of income when exchange contracts restrict divident payments, or to meet home or foreign government requirements (implemented via formal licensing agreements with their own controlled foreign subsidiaries)

Advantages of Licensing vs (1) Circumvention of import barriers that increase the cost

(tarrifs) or limit the quantity (quotas) of exports to the target market. When exports are no longer possible to a target market with

the sudden imposition of tarrifs or quotas or when exports were no longer profitable with the appearence of more intense competition

Prolonged depriaciation of target country’s currency Overcomes problem of high transportation costs, which

make the export of some products noncompetitive in target markets

If manufacture’s product requires substantial physical adaptation to meet the needs of target market, licensing may be advantageous because it can transfer most of the adaptation cost to the foreign licensee

Advantages of Licensing (2) Lower political risks

Some governments prefer licensing over foreign investment as a way to get technology

Licensing is immune to expropriation because licensor does now own physical assets in a target country

In some situations, a manufacturer may be kept out of a target country by both import and investment restrictions, and licensing becomes the only viable entry mode

For companies whose end product is a service, licensing or franchising may be a more attractive way to provide the service than through branch or subsidiary

As a low-commitment (managerial, technical and financial) entry mode may be especially attractive to small manufacturers

Agvanatgeous in case of low or uncertain sales potential in a target market

Disadvantages of Licensing For companies that do not posses technology,

trademarks or a company name that is attractive to potencial foreign users licensing is simply not a foreign market entry alternative

Lack of control over the marketing plan and program in the target country

The absolute size of income from licensing arrangement as compated to that from exporting to, or investing in, the target country (however, profitability can be very high)

The risk of creating a competitor in third markets or even in the manufacturer’s home market

Exclusiveness Opportunity costs (the cost of not being able to enter

the market in another way)

Profitability Analysis of a Licensing Venture In order to avoid 2 errors:

Underlicensing (not licensing when one should) Overlicensing (licensing when one should not)

versusExpected

profitability of a

licensing venture

Expected profitability

of alternative entry modes

Projecting Profit Contribution

Profit contribution of the venture = Incremental Revenues – Incremental Costs

(1) Research the foreign market to ascertain the market potential for this kind of product

(2) Estimate sales potential (market share potential) of the prospective licensee by evaluating his capacity to manufacture the licensed product at a competitive cost and quality and to sell it in the target market Basis for the projection of royalty revenues calculated as

a percentage of sales at an expected royalty rate

Incremental Revenues Lump-sum royalties (including disclosure fees) Technical assistance fees Engineering or construction fees Equity shares in licensee firm Dividends on equity shares Profits from sales to licensee (machinery, equipment, raw

materials, components, or nonlicensed products) Profits from purchase and resale of goods manufactured by

licensee Comissions on purchases or sales made for licensee Rental payments on licensor-owned mechinery or equipment Management fees Patents, trademarks, and know-how received from licensee

(grant-backs)

Incremental Costs Opportunity Costs

Loss of current export or other net revenues Loss of prospective revenues

Startup costs Investigation of target market Selection of prospective licensee Acquisition of local

patent/trademark protection Negotiation of licensing

agreement Preparation and transfer of

documentation Adaptation of technolog y for

licensee Training licensee’s employees Engineering, construction and

plant installation services Contribution of machinery,

equipment, and inventory to licensee

Ongoing costs Periodic training and

updating of licensee Maintaining local

patent/trademark protection Quality supervision and tests Auditing and inspection Marketing, purchasing, and

other nontechnical services Management assistance Resolution of disputes Maintenance of licensor staff

Selecting a Prospective Licensee

Elements of the Licensing Contract (1) (1) Technology

Package Definition /description

of the licensed industrial property (patents, trademarks, know-how)

Know-how to be supplied and and its method of transfer

Supply of raw materials, equipment, and intermediate goods

(2) Use conditions Field of use of licensed technology Territorial rights for manufacture and

sale Sublicensing rights Safeguarding trade secrets Responsibility for defence action on

patents and trademarks Exclusion of competitive products Exclusion of competitive technology Maintenance of product standards Performace requirements Rights of licensee to new products and

technology Reporting requirements Auditing / inspection rights of licensor Reporting requirements of licensee

Elements of the Licensing Contract (2) (3) Compensation

Currency of payment Responsibilities for payment

of local taxes Disclosure fee Running royalties Minimum royalties Lump-sum royalties Technical assistance fees Sales to and/or purchases

from licensee Fees for additional new

products Grantback of product

improvements by licensee Other compensation

(4) Other Provisions Contract law to be followed Duration and renewal of

contract Cancellation/termination

provisions Procedures for the

settlement of disputes Responsibility for

government approval of the license agreement

International Franchising Franchising is a form of licensing in which a

company (franchisor) licenses a business system as well as other property rights to an independent company or person (franchisee).

The franchisee does busines under the franchisor’s trade name and follows the policies and procedures laid down by the franchisor.

In return franchisor receives fees, running royalties and other compensation form franchisee

Most common busines fields: Fast-food restaurants, car rentals, construction, soft

drinks, hotels and motels, real estate brokerage.

Advantages and Disadvantages of Franchising

When Franchise is an attractive mode of entry? When company has a product that cannot be exported

to a foreign target country When company does not want to invest in a country as

a producer When company’s business process can be easily

transferred to an independet party in a target country

Not a good candidate for franchise: Physical products whose manufacture requires

substantial capital investment and/or high levels of managerial or technical competence

Service products that involve sophisticated skills (advertising, accounting, banking, insurance, management consulting)

Contract Manufacturing In contract manufacturing an international firm sources a product

from an independent manufacturer in a foreign country, and subsequently markets that product in the target country or elsewhere

Turnkey Construction Contracts A turnkey contract carries the standard

construction contract a step further by oblicating the contractor to bring a foreign contract up to the point of operation before it is turned over to the owner

Many turnkey contracts are with host governments Particulary exposed to political risks

Management contracts An international management contract gives a company

the right to manage the day-to-day operations of an enterprise in a foreign target country.

Management control is limited to ongoing operations Management contracts are used mainly to supplement an

actual or intended joint venture agreement or a turnkey project.

In this way, an international company can obtain management control over a non-equity foreign venture

Low risk market entry but income is limited to fees for a fixed duration of time

From an entry strategy perspective, management contracts are unsatisfactory because they do not allow a compnay to build a permanent market position for its products