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Global Market Entry Modes

Prof. A.K. Sengupta

Former Dean, Indian Institute of Foreign Trade

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Global Market Entry Modes Commitment to Export

Analyse

Internal Factors

-Product

-Resources

External Factors

-Market Environment

-Competitive Profile

Decide on

International Market InvolvementMarket Identification & targetingEntry mode SelectionMarketing Mix*Product *Price *Distribution *Promotion

OrganiseDepartmentSubsidiaryJt. VentureExport House

Allocate Resources*Product*Arrange Resources

Export

ReviewModifySet new target

Set Targets

Implement

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The Concept of International Market Entry

• An institutional mechanism by which a firm makes its products and services available to consumers in overseas markets

• Franklin Roots defines the market entry strategy as a comprehensive plan which sets forth the objectives, goals, resources and policies that guide a company’s international business operations for achieving sustainable growth in world markets.

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• Once a firm has decided to establish itself in global market—it becomes necessary that the Company studies and analyzes the various options available to enter the international markets and select the most suitable one.

• This decision is to be taken with utmost care—Not only is the financial resources in stake but the extent to which the company‘s marketing strategy can be employed in the new market also depends on this decision.

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• Mode of entry varies from low -risk ,low-control modes with minimum resource commitment eg. indirect exports to high-risk, high control modes with a higher level of commitment by establishing its own manufacturing facilities in foreign markets (subsidiaries).

• Factors

i) The ability and willingness of the firm to commit resources.

ii) The firm’s desire to have a level of control over international operations.

iii) The level of risk the firm is willing to take

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Alternative Entry Modes

Production in Home Country Production in Foreign Country

Exports Providing Offshore Services

Contractual Mode Investment Mode

Indirect DirectOverseas

Assembly or Mixing

Joint Venture Wholly Owned Foreign

Subsidiaries

International Licensing

International Franchising

Turnkey Projects

Management Contract

International Strategic Alliance

Contract Manufacturing

Distribution Access

Technology Alliance

Production Alliance

B & T BOT BOO

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Production in Home Country

Export Entry

•A firm has two basic options for carrying out export operation.

--Market contacted through a domestically located intermediary—an approach called Indirect Exporting

--Market can be reached through an intermediary located in foreign market--an approach termed as –Direct Exporting

Indirect Export

--When firms do not have much exposure and has limited resources –Indirect Exports

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•Indirect exports occur

-Selling to a domestic broker/ foreign buying agent in home country

-Exporting through merchant intermediary-export house

•Foreign firms having buying offices in India

•Trading House

--Soga Shosha in Japan

--Export Management Company and Export Trading Company in USA

--Commercializadoros in Latin American Countries

--Operateur Specialize en Commerce Exterior in France

--Trading Houses in India, Canada and Hong Kong

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Export Houses in IndiaCategory Performance (in Rupees

One Star Export House 15 Crore

Two Star Export House 100 Crore

Three Star Export House 500 Crore

Four Star Export House 1500 Crore

Five Star Export House 5000 Crore

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Market selection and market researchCustomer identification and evaluationCommercial and technical negotiationsVendor developmentProduct/packaging adaptationImports, particularly of items required for export productionProvide protection against export riskFinancial arrangements including securing creditExport documentation and shipping

•Functions of Trading Houses

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•Direct Exports

A firm’s product is directly sold to importers-Sole distributor

Foreign country based intermediaries--Agents

Company owned Sales Offices

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The basic duty of an agent is to secure orders in the name of and on account of the principal—does not trade on his own—gets commission on the basis of orders secured.

Advantages of having agents

Exporting through Agents

• Legal stipulation.

• Local man-knowledge of the marketing conditions.

• Good contacts with decision-makers.

• Set-up in major commercial centres-can call personally on main buyers at regular intervals.

• Commercial and Trade information relevant to principal’s product line can be passed on by the agent with greater speed.

• Paid a commission-no fixed or overhead cost.

• Well-established agents have warehousing facilities

• Has specialized sales staff to handle sales.

• Can provide after-sales service.

• Easier to appoint an agent compared to importer-distributor. Distributors lock up working capital of product which does not move at the same rate as it was anticipated. An agent on the other hand does not risk anything.

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Limitations of Agents

• May work for other principals-competitors

• For Technical products-may some time find difficult to keep himself informed of their latest technical merits.

• An agent may not put his best-fear the principal may start on his own.

Identifying Foreign Agents

• Indian Embassies/High Commission.

• International Merchant Banks.

• Chamber of commerce.

• Import Promotion Organisation.

• International Union of Commercial Agents & Brokers at Amsterdam.

• Visiting Trade Fair & Exhibitions.

• Inserting Advertisement.

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Selection of Agents

Selection takes time and effort and calls for good judgment.

Three Qualities of Agents are:

1. Character : means the agent must have established his credibility.

2. Capital : must have sound financial base.

3.Capacity : must have contacts in the right places and possess adequate marketing experience.

Other considerations

• Question arises on big agency house or smaller one.

• Answer depends on level of business the exporter expects to generate.

• Small agents-may make sincere attempts to get business and will devote more attention to promote company’s product.

• Disadvantage-may not have adequate contacts-lack of experience in promoting technical & specialized products.

• Another factor is to find out about competitive and complimentary product-for complimentary products agents will have wide contacts.

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Appropriateness of Agents

• How long has the agent been in business ?.

• How many salesman has he got ?. Their age and experience.

• Does he carry any lines that are directly competitive with or complementary to the firm’s line ?.

• Total turnover during the last few years.

• What is the average turnover per account ?.

• Has he got adequate working capital ?.

Motivating the Agents

• Granting Exclusive Agency Rights

• Variable commission rates

• Supplying promptly promotional materials and samples

• Invite agents to see company’s operations first hand

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Evaluation of Agents

• Share of the market the company has secured

• How the market share changing?.

• Annual rate of growth in sales

• Number of new customers

Payment of Agency Commission

• Purchase foreign exchange from the free market

• Alternatively, he can maintain a foreign exchange account (EEFC)

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Export Agency Agreements

Agency agreement is a legal document which establishes the commercial relationship between the principal and the agent.

It incorporates the conditions actually agreed upon by the concerned parties for the conduct of business. When negotiating an agency agreement, the Indian firm should be careful on certain points. These are :

 i) Parties to the contract

 ii) Contractual products

 iii) Contracted territory

Hidden Commission

International buying groups may like to contact the exporter directly. Exporters should reserve the right to negotiate directly with international buying groups in his own country for orders which ultimately will be executed in the agents, territory – whether the agent will be eligible to commissions on such sales should be made explicit in the agreement.

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Acceptance or Rejection of order

• When credit terms are involved and the principal is not sure of the credit worthiness of the buyer, he should have the right to reject the order.

•  Very small order.

Payment of commission

• Rate on which commission will be paid.

• Calculated on percentage basis – the base for such calculation

• The time when commission becomes payable-payable only on realization as per RBI regulations.

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Settlement of disputes

• Mechanism for settling disputes should be agreed upon in advance by both parties and indicated in the agency agreement.

• Referring the disputes to arbitration is the best procedure-venue and the proper law of the agreement.

• India as venue and Indian law as the proper law. If not acceptable to the agent then:

• Two possibilities of compromise

a) Venue will be a third country

b) Place of defender

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Renewal and Termination

• Agent is sound then no principal will think of termination.

• Problem arises when agent is not effective.

• Compensation to be paid to agent.

• Minimum turnover clause in agreement.

• Agent fails to reach the pre-determined level can be taken as valid ground of termination.

• No terminal compensation becomes payable.

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Company owned sales offices

• Many companies export directly to their own sales subsidiaries abroad, side-stepping independent intermediaries

• Sales subsidiary assumes the role of the independent distributor by stocking the manufacturers products ,selling to buyers, and assuming the credit risk

• The sales- subsidiary offers the manufacturer full control of selling operations in a foreign market

• Example—General Motors exports its Saturn cars to Japan through two of its sales subsidiaries. It side stepped Yanase, its Japanese importer. Its vigorous marketing effort made it possible to sign up 20 dealers in one year.

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Production in foreign country

Contractual Entry

Licensing

• A company assigns the right to a patent (which protects a product,

technology or process) or a trademark( which protects a product

name) to another company for a royalty

• Licenser gives technology, manufacturing right, brand and also

marketing right (unlike contract Manufacturing)

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• Licensee gains marketing right- Exclusive basis or

Unrestricted basis

• Variety of time period 5 to 15 years

• Licensee makes all capital investments

• Licensing agreements subject to negotiation –vary from

Co. to Co. and industries to industries

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Reasons for Licensing

• Developed countries, enjoying competitive advantage in proprietary technology and own majority global brands are beneficiaries of international licensing--Shelved technology

• A company may not have knowledge or time to engage actively in international marketing

• Market potential comparatively small

• Limited resource- Company gains advantage with foreign partner

• Licensing saves capital- no additional investment is necessary-but also no managerial resources needed

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• Where political and economic risks uncertain-licensing arrangement provides opportunities to venture into sensitive markets

• Facilitates rapid penetration in international market for technology intensive products and processes

• Provides access to markets with high levels of tariffs and non-tariff barriers

• Mattel Co of US licensing arrangement in Japan

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Disadvantages of Licensing

•Co has to depend on local licensee ‘s marketing effort

•Uncertainty of maintaining quality products by local licensee

•Licensee may turn to be a competitor after expiry of license

•Royalty is generally lower than profits 3-5 percent

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International Franchising

• A special form of licensing in which a home company (Franchiser) makes a total programme of operation available to an overseas company (Franchisee)

• It includes the brand name, logo, products and method of operation

• Mc. Donald’s, KFC, Burger King, Holiday INN, Hertz, Carrefour, Benetton, Coca Cola (trade mark, recipe, and advertising)-independent bottlers around the world

• It is a transfer of the entire system from one country to another

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Difference between Licensing and FranchisingLicensing Franchising

Royalty Management Fees

Products are major source of concern

Covers all aspects of business including goodwill, trade marks, IPR etc

15-20 years 5/10 Years – renewable

Licensing tends to be self selecting. They are often established businesses and can demonstrate that they are in a strong position to operate the license in question.

A licensee can often pass a license to an associate with little or no reference back to the original licensor.

The franchisee is selected by the franchiser. Even replacement is controlled by franchiser.

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Concerned with specific existing products and technologies

Franchisor passes to the franchisee the benefits of on-going research programs

There is no goodwill attached to the licensing as it is totally retained by licensor

Although franchisor does retain the goodwill, the franchisee picks up an element of localized goodwill

Licensee enjoys substantial measure of fee negotiation

Standard fee structure. Any variation will cause confusion

Lesser control Exerts higher control

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Overseas Turnkey Projects

• Companies utilize technical expertise to enter international markets

• Types of Turnkey Projects

- Build and Transfer (Conceptualizes, designs, builds, testing and transfer the project to the

owner

- Build/Operate and transfer (BOT) (Build the project and manage for the contracted period before transferring to the foreign owner)

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- Build, operate, own (BOO) (Firm buys the project, once it has been built)

• How turnkey projects are awarded

- Contracts for large scale turnkey projects are awarded on the basis of competitive international bidding

- Projects are funded by international financial institutions – ADB, world bank etc.

Air conditioning of Hong Kong airport, Etisalat Building in Sharjah by Voltas, L&T, EIL

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International Management Contracts

• Company provides its technical and managerial expertise for a specific duration to an overseas firm.

• Low risk, low cost mode of entry.

• Earn foreign exchange and optimally utilize its skilled manpower

• Good scope in Africa, Latin American countries and CIS

• IOC – manages aviation stations in Bhutan, Maldives

Oberoi Hotels in Africa

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Strategic Alliance• Refers to the relationship between two or more firms that

cooperate with each other to achieve common goals but do not form a separate company.

• Firms focus on their core competencies

• Difference between strategic alliance and joint venture

- In Joint Venture two partners contribute a fixed amount of resources and the venture develops on its own

Joint Venture

Parent Company X

Parent Company Y

Company X (Joint Venture)

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-In strategic alliance each partner brings a particular skill or resource – usually they are complementary and by joining forces each expects to profit from the other’s experience-No equity participation

Company X

Strategic Alliance

Contractual

AgreementCompany Y

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Benefits of Strategic Alliance

• Encourage cooperation with competitors to make use of their specific strengths.

• Cost of investment for market entry is shared

• Give excess to the distribution channels of partner firms

Types of Alliance

Alliances involved either distribution access or technology transfers .

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Distribution Access

• Exporter uses overseas distribution channel of another firm

• Exporting company is known as a rider – foreign company with established distribution channel is known as a carrier

• Products are from unrelated companies that are complementary (allied) but non-competitive A common practice in piggy backing is that the rider retains its branding. The market promotion activity is carried out with mutual consent

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Advantages

• Allows rider access to overseas market without establishing own distribution channel

• Gives rider a chance to learn and understand the entire process which assists later setting up own channels

• Helps carrier to fill up gaps in its own product line by offering wider product range

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Limitations

• Carrier – concern about quality continuity of supply. Rider – handing over full control off distribution to carries which may not be compatible with firms long term marketing goal.

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Examples

• Wrigley’s (US based chewing gum company) entered Indian markets using Parry’s distribution network.

• Tanishq in India has company controlled retail outlets in India – has tied up with High Glow jewelry to use its retail distribution channel in USA.

• Tata Motors launched its range of Indica cars in UK under brand name City Rover using marketing channel of M G Rover Group-which has strategic strength in marketing having wholly owned sales organizations in Europe including U K .

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• M G Rover identified the need to introduce a small car which would target the CITY Car sector- Tata Indica fitted the Co’s requirement as the basis of CITY ROVER

• Smirnoff and Pepsi

• Nestle has strategic alliance with Coca Cola to market its Ready –to- drink coffee and tea under brand names

Nescafe and Nestea

Technology AllianceBiotech and Pharmaceutical industry

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• To develop medicine market in Poland Ranbaxy has forced strategic alliance with Smithkline and Schnarz Pharma

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Contract Manufacturing

• An international firm arranges to have its products manufactured by an offshore local company on contractual basis

• Local manufacturers responsibility is only production

• Marketing responsibility is on Parent company

• No legal bindings – change contracted manufacturers to improve quality and cost effectiveness

• A number of global companies outsource manufacturing activities to low cost locations.

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• Globalization of business technologies and increasing pressure on international firms to be globally competitive in costs, product offering, speed to bring new products – driving force of international contract manufacturing

• Economic development of a number of countries depend on contract manufacturing like China, Korea, Mexico, Thailand, Taiwan, Now Indonesia, Vietnam and India

• E.g. Taiwan – world leader in semi conductors, China – 30% AC, 24% washing machines, 16% refrigerators sold in the USA. Nike shoe – entirely manufactures through contractual basis

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Example :

1. Chrysler has contract manufacturing arrangement with Daimler-Punch an Austrian group to build its jeep Cherokee model under contract of yearly volume of 47,000 – Chrysler supplies stamped metal parts

2. French Shoe company in China and Indonesia

3. Nike entire production is on contract manufacturing. Likewise Reebok, Adidas etc, Electronic industry in USA and Europe

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Local Manufacturing

• A common and widely practiced form of entry is local production of company’s products.

Types:

• Overseas Assembling

• Joint Venture

• Wholly Owned Subsidiaries

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Reasons for Local Production

•Local cost, market size, tariffs, laws and political consideration may affect a choice to manufacture locally

• Sometimes cost cutting rather than market entry – International firms establish plants in Taiwan, Malaysia, Vietnam, China – little intention to enter the market – export to third country

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Wholly- owned subsidiary

• Tata Tea entered into JV with Tetley group, UK in 1994,acquired Tetley in 2000

• Asian paints has 27 manufacturing plants in 24 countries

• Aditya Birla Group has wholly owned manufacturing base in south east Asia

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• Establishing local operation to gain new business

An aggressive strategy – a strong commitment in international operation – often the only way to convince clients to switch suppliers

Important strategy in industrial market – service and reliability of supply main factors in the choice of suppliers

• Establishing Foreign production to defend existing business

Changing economic or political factors necessitate such a move

E.g. Japanese car manufacturers, that had been subject to an import limitations of assembled cars, from USA imported from Japan, began to build factories in USA to protect their market.

In 1982 Honda became the first Japanese manufacturer to set up production in USA

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• Moving with established customer

In many industries, important suppliers keep a relationship by establishing plants near customer locations – when customers build new plants elsewhere, suppliers move too particularly among Car manufacturers and part suppliers

• Ownership Strategy Company’s entering a foreign market have to decide on more than the most suitable entry strategy – WOS or JV

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Assembly

• A firm locates a portion of the manufacturing process in the foreign country

• Assembling consist of the last stage of the manufacturing and depends on a ready supply of components or manufactured parts to be shipped from another country

• Involves heavy use of labor rather than expensive investment of capital outlets

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• In order to save in shipping costs and high import tariffs and counter non tariff barriers and take advantage of cheap labour cos exports components in CKD condition and assembles them overseas e.g Mahindra &Mahindra, has entered Kenya by assembling operation

• Tata motors assembling operations with Nita Company Ltd in Bangladesh for commercial vehicles

• Japanese automobile cos have entered European market by assembling to overcome import barriers

• Sometimes Cos may use some of the local resources

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Joint VentureUnder a joint venture arrangement a foreign company invites an outside partner to share stock ownership in the new unit –minority or majority or 50:50share

Reasons for JV• By bringing in new partner , company share the risk for a

new venture

• JV partner may have important skills or contacts of value to the firm

• Local firm has good contacts with the government and represents local business interests

• Provide greater control over production and marketing functions

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Examples: During 1960-70 Japanese market was viewed as a difficult environment—govt regulations—JV

Mc Donald’s entered Japan in 1971 through JV with Fujita &Co

Mc Donald’s in India through JV

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Wholly -owned foreign subsidiaries• In order to have complete control and ownership of

international operations, a firm opts for foreign direct investment to own foreign operations.

• Benefits Develops a foreign market with growth potential by

way of product differentiation and competitive response

Helps in overcoming import barriers-high tariffs, quota

Gets benefits of incentives provided by host countries Helps a firm to spread risks over various markets Take advantage of lower cost of production in host

countries—raw material. labour Avoids conflicts with overseas partners

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•Limitations:

Need substantial financial and other operational resources

Need substantial international exposure before establishing WOS.

• Ways of establishing WOS

Acquisition Greenfield operation

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• Acquisition

• A company can acquire a foreign company and all its resources in a foreign market

• Acquisition provides speedy access to the resources of a foreign company such as skilled man power , the company’s product and brand and its distribution channels

• Green field operation

• The firm creates the production and marketing facilities on its own from scratch

• Green field operations preferred under following situations Smaller firms with limited resources Have the option of selecting own location on the basis of

their own screening criteria Example page 47

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