entering international markets through exports and licensing agreements session 3
TRANSCRIPT
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
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?
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?
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
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
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.
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