entry strategy

Entry Strategies for a pharmaceutical company in the international market

Khushali A Shah

PGDM (e-business)

Roll No: 17

ACKNOWLEDGEMENT

I owe a great many thanks to Mr. Rajiv Gupte who helped and supported me during the research of this project.

My deepest thanks to him for guiding and correcting various documents with attention and care. He has taken pain to go through the project and make necessary changes.

Finally, I thank my institute - Mumbai Educational Trust (MET-PGDM) and our coordinator Prof. V. Naik for their valuable support.

Sign :

Prof. Rajiv Gupte

Index

S. No. Topic Page No.1 Overview of Pharmaceutical Sector 4

1.1 The domestic Pharmaceutical Industry 51.2 Pharmaceutical Export Promotion Council (Pharmexcil) 71.3 Research and Development 91.4 Contract Manufacturing 101.5 International Co-operation/Export Promotion 112 Entry strategies in a new Market 13

2.1 Production in the home country 142.2 Foreign Manufacturing 173 The Selection of an International Market Entry Mode 26

Overview of Pharmaceutical Sector

During the current year 2009-10, Pharmaceutical was among the few sectors that managed to expand its revenues despite global recession and financial crises. Strong domestic demand, growing preference for generics worldwide and favourable rupee-dollar exchange rate helped the Indian Pharmaceutical sector. Aggregate income of the drugs and pharmaceuticals companies for the first two quarters of the current year grew by 13 per cent and 7.8 percent respectively as compared to previous year. As per Centre for Monitoring Indian Economy (CMIE) ,the estimated growth in aggregate income for the next two quarters is 9.5 per cent and 10.2 percent respectively.

The Indian pharmaceuticals industry has grown from a mere US$ 0.32 billion turnover in 1980 to approximately US$ 21.26 billion in 2009-10.The country now ranks 3rd in terms of volume of production (10% of global share) and 14th largest by value.

Growth of Indian Pharmaceutical Industry from 2002-03 to 2008-09 are given in table below:

Figures in Rs Crore

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Domestic Market

30365 32575 34128 39989 45367 50946 55454

Exports 12826 15213 17857 22216 24942 30760 38433

Imports 2865 2956 3139 4515 5867 6734 8552

Total Market Size

42326 47332 52029 62566 68442 78610 89335

Source: Annual Report 2008-09,Department of Pharmaceuticals, Government of India

Exports

India currently exports drug intermediates, Active Pharmaceutical Ingredients (APIs), Finished Dosage Formulations (FDFs), Bio-Pharmaceuticals, Clinical Services to various parts of the world.

Export of drugs and pharmaceuticals from 2002-03 to 2009-10 (May,09) are given in table below:

Year Exports Growth %

2002-03 12826

2003-04 15213 18.61

2004-05 17857 17.38

2005-06 22216 24.41

2006-07 26895 21.06

2007-08 30760 14.37

2008-09 38433 24.94

April, 2009 3043 14.80

April 2009-Dec 2009 29551 -

Source: Directorate General of Commercial Intelligence and Statistics (DGCIS) Kolkata

The domestic Pharmaceutical Industry

The domestic Pharmaceutical Industry has recently achieved some historic milestones through a leadership position and global presence as a world class cost effective generic drugs' manufacturer of AIDS medicines. Many Indian companies are part of an agreement where major AIDS drugs based on Lamivudine, Stavudine, Zidovudine, Nevirapine will be supplied to Mozambique, Rwanda, South Africa and Tanzania which have about 33% of all people living with AIDS in Africa. Yet another US Scheme envisages sourcing Anti Retrovirals from some Indian companies whose products are already US FDA approved.

Many Indian companies maintain highest standards in Purity, Stability and International Safety, Health and Environmental (SHE) protection in production and supply of bulk drugs even to some innovator companies. This speaks of the high quality standards maintained by a large number of Indian Pharmaceutical companies as these bulk actives are used by the buyer companies in manufacture of dosage forms which are again subjected to stringent assessment by various regulatory authorities in the importing countries. More of Indian companies are now seeking regulatory approvals in USA in specialized segments like Anti-infectives, Cardiovasculars, CNS group. Along with Brazil & PR China, India has carved a niche for itself by being a top generic Pharmaceutical player.

Increasing number of Indian pharmaceutical companies have been getting international regulatory approvals for their plants from agencies like USFDA (USA), MHRA (UK), TGA (Australia), MCC (South Africa), Health Canada etc. India has the largest number of USFDA - approved plants for generic manufacture. Considering that the pharmaceutical industry involves sophisticated technology and stringent "Good Manufacturing Practice (GMP) requirements, major share of Indian Pharma exports going to highly developed western countries bears testimony to not only the excellent quality of Indian pharmaceuticals but also its price competitiveness. More than 50% share of exports is by way of dosage forms. Indian companies are now seeking more Abbreviated New Drug Approvals (ANDAs) in USA in specialized segments like anti-infective, cardio vascular and central nervous system groups.

Exports

The Domestic pharmaceutical sector has been expanding and has is estimated at US$ 11.72 billion (Rs 55454 crore) in 2008-09 from US$ 6.88 billion (Rs 32575 crore) in 2003-04. Indian exports are destined to various countries around the globe including highly regulated markets of USA, Europe, Japan and Australia.

Export of domestic drugs and pharmaceuticals from 2003-04 to 2008-09 are given in table below:

S.No.Domestic Indian market

(figure in Rs crore)

Growth Rate

(%)

2003-04 32575 7.28

2004-05 34128 4.77

2005-06 39989 17.17

2006-07 45367 13.45

2007-08 50946 12.30

2008-09 55454 8.85

Source: Annual Report 2009-10, Department of Pharmaceuticals, Government of India

Pharmaceutical Export Promotion Council (Pharmexcil)

The Department had played a pivotal role in the formation of Pharmexcil consequent to the recommendation from 9th Five YearAnnual Plan Working Group Report on Drugs and Pharmaceuticals. In the light of this, the Department constantly interacts with Pharmexcil in their work areas. The role of Pharmexcil is for facilitation of exports of Drugs, Pharmaceuticals, Biotechnology products, Herbal medicines and Diagnostics, to name a few.It is authorized to issue Registration-cum-Membership Certificate (RCMC) which is one of the requirements for the importers and exporters of commodities. In addition to this, Pharmexcil is concerned with giving export thrust to the various products through visits of delegations to various markets abroad, organizing of seminars, workshops and exhibitions.As a major area of work, Pharmexcil also holds Buyers/Sellers meets and compiles detailed data base on pharmaceutical exports and problems in exporting pharmaceutical group products of Pharmaceuticals.

Key Strengths of Pharmaceutical Sector

Low cost of innovation/Manufacturing/Capex costs/expenditure to run a cGMP compliance facility.

Low cost scientific pool on shop floor leading to high quality documentation.

Proven track record in design of high tech manufacturing facilities.

Excellent regulatory compliance capabilities for operating these assets.

Recent success track record in circumventing API/formulation patents.

About 95% of the domestic requirement being met through domestic production.

India is regarded as a high-quality and skilled producer in the world.

It is not only an API and formulation manufacturing base, but also as an emerging hub for: Contract researchBio-technologyClinical trials andClinical data management.

The country has the distinction of providing quality healthcare at affordable prices.

Top 20 destinations of Indian Pharmaceutical products during 2008-09

S. No. Importing country 2008-09 (figure in Rs Crore)

1 USA 7103.27

2 Russia 1519.20

3 Germany 1441.87

4 Austri 1417.15

5 UK 1233.09

6 South Africa 1126.75

7 Canada 1090.43

8 Brazil 1018.89

9 Nigeria 1001.74

10 Ukraine 687.22

11 Israel 686.22

12 Netherlands 669.98

13 Spain 620.02

14 Turkey 614.20

15 China 561.53

16 Kenya 543.86

17 Vietnam 536.62

18 Belgium 520.90

19 Italy 57.85

20 Mexico 501.54

Source: Directorate General of Commercial Intelligence and Statistics (DGCIS) Kolkata

Research and Development

In no other Industry segment innovative R&D is as critical as in Pharmaceutical industry. Here, the New Drug Discovery Research (NDDR) has to keep pace with the emerging pattern of diseases as well as responses in managing existing diseases where target organisms are becoming resistant to existing drugs. The NDDR is also an expensive activity. It is encouraging to observe that at least 10 Indian companies are into new drug discovery in the areas of infections, metabolic disorders like diabetes, inflammation, respiratory, obesity & cancer. Most of these companies have increased their R&D spending to over 5% of their respective sales turnovers. There is notable success from some Indian companies in out licensing new molecules in the asthma and diabetes segments to foreign companies. Introduction of Product Patent for Pharmaceuticals is an important feature for Indian Pharmaceutical R&D scenario. This has boosted the confidence of MNC Pharmaceutical companies in India where a number of western Pharmaceutical companies have already R&D collaborations with Indian Pharmaceutical companies in the field of NDDR. Some Indian companies have also got US-FDA approvals for their new molecules as Innovative New Drugs (lND).

Western Pharmaceutical companies have recognized the attractiveness of India as a R&D outsourcing destination due to low cost scientific manpower, excellent infrastructure, top quality with capability to conduct modern research under GLP, GCP guidelines. Many of them have set up independent R&D centres in India.

Clinical Trials to establish safety and efficacy of drugs constitute nearly 70% of R&D costs. Considering the low cost of Research and Development in India, several MNC Pharmaceutical companies as well as global Clinical Research Organizations are increasingly making India a clinical research hub. In conclusion new drug discovery in India has made a promising start wherein at least five to six potential candidates in the areas of Malaria, Obesity, Cancer, Diabetes and Infections are likely to reach Phase II clinical trials.

Contract Manufacturing

Many global pharmaceutical majors are looking to outsource manufacturing from Indian companies, which enjoy much lower costs (both capital and recurring) than their western counterparts. Many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA.

Indian companies are proving to be better at developing Active Pharmaceutical Ingredients (APIs) than their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering in to strategic alliances with large generic companies in the world of off-patent molecules or entering in to contract manufacturing agreements with innovator companies for supplying complex under-patent molecules.

Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals, Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large Indian companies started undertaking contract manufacturing of APIs as part of their additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending on Indian companies for many of their APIs and intermediates.

International Co-operation/Export Promotion

An important focus area for the Department of Pharmaceuticals is of promotion of Indian pharmaceutical exports.The Department participated in the following International Cooperation events during 2009-10:-

The fourth meeting of the India-EU Joint Working Group on Pharmaceuticals and Biotechnology was held in the month (September, 2009 at New Delhi under the Co- chairmanship of Shri Arun Jha, Joint Secretary (Pharmaceutical).

Participation in the BIO 2009, held in May, 2009 in USA.

Participation in the India-USA HTCG, held in May, 2009 on the margins of BIO 2009.

Organization of Brand India -Indian Pharma Expo in Myanmar from 12-14 June, 2009.

Participation in the 45th Annual Meeting of the DIA, held in June 2009 in San Diego, USA.

Organization of India Pharma Summit 2009, on 30th September 2009 in Mumbai and celebration of India Day on 1st December, 2009 and CPhl 2009, held from 1st to 3rd December, 2009.

Participation in the US-India Bio Pharma and Healthcare Summit which was held in Boston on 14-15 May, 2009.

Visit of Nigerian delegation led by DG, National Agency for Food & Drug Administration & Control to India in connection with wrong labeling of generic drugs as being of Indian origin even while not being actually made in India.

Department of Pharmaceuticals also provided financial assistance for following activities, for promotion and development of the sector:

Publishing of advertisement in Kazakh journal "Ghazab Hindustan" for promotion of Indian Pharmaceutical products in Kazakhstan.

Conducting of Pre-feasibility study for development of a Greenfield Project for Medical Devices Cluster in Gujarat and a Brownfield Project for Bulk Drugs Cluster in Andhra Pradesh.

Presentation of Patent Awards on the eve of Indo-Africa Pharma Business Meet.

Preparation of Film on Pharmaceutical Industry in India.

Major Pharmaceutical Public Sector Undertakings

Indian Drugs & Pharmaceuticals Limited (IDPL) Hindustan Antibiotics Limited (HAL) Bengal Chemicals & Pharmaceuticals Limited (BCPL) Rajasthan Drugs and Pharmaceuticals Ltd. (RDPL) Karnataka Antibiotics & Pharmaceuticals Ltd. (KAPL)

Major Pharmaceuticals Industries in India

Aurobindo Pharma Ltd Aventis Pharma Ltd Cadila Pharmaceuticals Ltd Cipla Ltd Dabur Pharma Ltd Dey's Medical Stores Mfg. Ltd Dr. Reddy's Laboratories Ltd Elder Pharmaceuticals Ltd Glenmark Pharmaceuticals Ltd Glaxo SmithKline Pharmaceuticals Ltd Lupin Ltd Merck Ltd, India Piramal Health Care Novartis India Pfizer Ltd Ranbaxy Laboratories Ltd Wockhardt Limited Wyeth Laboratories Ltd

Entry strategies in a new Market

Market Identification and Selection

Any firm wanting to internationalize its operations may adopt either a reactive or a proactive approach to market identification as described below:

Reactive Approach to Market Identification:

Most firms internationalize as an unintended response to an international marketing opportunity in the form of unsolicited export orders. In doing so, the positive stimulus in terms of increased profitability, turnover, market share, or image leads to catering to overseas markets as a repeat activity. A firm takes up overseas marketing on a regular basis. Consequently, international marketing becomes an integral part of the firm’s marketing strategy.

Systematic Approach to Market Identification:

However, a systematic proactive approach is generally adopted by larger companies in selecting international markets. Since a firm has limited resources, it has to focus on a few foreign markets. Besides, proper selection of markets avoids wastage of the firm’s time and resources so that it can concentrate on a few fruitful markets. A firm has to carry out preliminary screening of various countries before a refined analysis is carried for market selection.

The approach to enter into international markets can range from minimum investment with infrequent and frequent exporting to large investments of capital and management in order to capture and maintain a permanent, specific share of world markets. Depending upon the firm’s objectives and market characteristics any of these approaches can be adapted.

Very often, entering international markets is not a matter of choice but of necessity to stay competitive in new and established markets. An executive involved in global marketing operations should have a thorough understanding of various entry modes. The major modes of entry into international markets adapted by firms are discussed in detail.

1.0 PRODUCTION IN THE HOME COUNTRY

There are two possible ways of tapping overseas markets basing your operations in the home country. These are (a) indirect export and (b) direct export.

1.1 Indirect Export

The simplest form of indirect export one can think of is sales which are effected from the country when the foreign visitors purchase goods and in the process add to the foreign exchange earnings of the country. Foreign department stores or firms that have branch offices locally or agents who make purchases on behalf of their parent offices abroad also lead to one form of indirect export. Though resulting in foreign exchange earnings to the country, they are not the result of any deliberate effort on the part of locals to promote exports.

The most important means of indirect export is through merchant exporters/export houses where the manufacturer entrusts the job of selling his products abroad to the specialist agencies which normally do engage in manufacturing.

1.1.1 Advantage of using an Export House / Merchant Exporter

Exporting through merchant exporter/export house can confer the following advantages:

1. The manufacturer avoids the problems of direct exporting such as investment of resources, collecting market intelligence, setting up of export department etc. and is served with instant foreign market knowledge.

2. Since the operational cost of export house / merchant-exporter will be spread over several parties, going through them will result in saving in unit cost.

3. In case the export house works on commission basis, there is possibility of expansion of exports, since there is incentive for the export house to expand sales.

4. In view of the fact that the export house will be effecting consolidated shipments there is a possibility of reduction in unit freight.

5. The reputation of export house will enable the manufacturer to get better representation for his products abroad. In case the export house is selling complementary products, sales might increase.

1.1.2 Disadvantage of using Export House / Merchant Exporter

1. The export house/merchant exporter, in order to earn more through commission, may take on too many unrelated lines resulting in the producer getting neither the expertise nor the attention he is looking for.

2. There is a possibility, under this arrangement, of the manufacturer continually depending on the export house and not developing export expertise himself.

3. There is also a possibility of both the manufacturer and the export house lacking personal involvement in the export business since either party may drop the other at any moment.

4. In view of the fact that the export house will be pushing the product abroad on its own name and reputation, the foreign customers may not associate the product with the manufacturer at all. This danger is more if the export house uses its letterhead and brand name.

Another form of indirect export is the consortium approach i.e., a limited number of manufacturers of the same product joining together and exporting it on a cooperative basis. In this type of arrangement, export management function is performed for several firms at the same time. There is closer cooperation and control as compared to merchant exporter or export house. Export orders will be procured on a joint basis and distributed amongst the constituent units. The individual units will be permitted to use their own letterheads and brand name. This arrangement confers more bargaining power on the consortium since the parties coming together can bargain over a position of strength. As in the case of exporting through export house, there is a possibility of saving in unit freight on account of consolidated shipment. Under-cutting is reduced to a great extent and all economies of scale associated with joint operation can be reaped.

The greatest disadvantage of consortium approach is that for this approach to succeed there should be perfect understanding among the members and each one should put in his best. As is well-known, cooperation can succeed only to the extent the individual members want it to succeed. Misunderstanding may arise over main issues and the presence of unscrupulous members is enough to spoil the business or the entire consortium.

1.2 Direct Export

When a manufacturer engages in direct export he takes more risks but gets more returns. More than anything else, direct export means more involvement for the manufacturer, more control and more expertise with the firm.

2.0 Foreign manufacturing

There are various reasons for a company to go in for foreign manufacturing. Some of them are:

1. High cost of shipping of product to the export market;

2. Tariffs and non-tariff restrictions in the importing country;

3. Nationalist feelings in the country concerned not favouring import products;

4. Large size of the country, particularly regional groupings justifying establishment of manufacturing facilities in that country/region;

5. Greater scope to be in constant touch with the changing requirements of the foreign customer which is particularly true of fashion goods;

6. Lower production costs due to availability of cheaper/plentiful factor(s) of productions and

7. Advantages of acquiring an existing foreign product with all his facilities

Foreign manufacturing can take one or more of the following forms:

1. Assembly

2. Contract manufacture

3. Licensing

4. Joint Venture and

5. Wholly-owned foreign production (100% ownership)

2.1 Assembly

Under assembly, most of the components or ingredients are domestically produced and finished products are assembled abroad. All exports on CKD condition are examples of assembly. In a slightly different way, the pharmaceutical industry may also be considered to be engaged in assembly though here the ingredients are “mixed” and not “assembled”. For assembly, the firm may have its own arrangements abroad or leave it to a local party to assemble the product. A company may go for this sort of arrangement either to avoid high transportation cost of the final product or to take advantage of the cheap labour available in the export market or to get over the high tariff and non-tariff restriction.

2.2 Contract Manufacture

In this method of market entry, manufacturer permits the production of his product abroad by a local party under contract with him but he reserves to himself the right of marketing that product in that market. It is obvious that this type of arrangement is possible if only there is a producer with the necessary capability to manufacture the product and maintain its quality. Normally firms with comparative advantage in marketing and service, rather than production, resort to contract manufacturing. Procter and Gamble is known to have many of its products manufactured abroad under contract. This method is advisable particularly in politically unstable countries where one would always like to pull out at short notice in case of trouble.

The disadvantages of contract manufacturing are:

1. The parent company has to forego the manufacturing profit to the local firm;

2. It is not always easy to locate a local party with the necessary capabilities to manufacture the product upto the requirements of the parent firm;

3. The possibility of the local party gaining experience in marketing in the course of time and posing a threat to the parent party; and

4. The difficulties faced in maintaining the quality of the product upto the standard required of the parent firm.

2.3 Licensing

As compared to contract manufacturing, licensing is for a longer term and involves must greater responsibilities on the part of the national party. Licensing is an arrangement wherein the licenser gives something of value to the licensee in return for certain performance and payments from the licensee. The licenser may agree to give one or more of the following:

1. Patent Right

2. Trade Mark Rights

3. Copy Rights

4. Know-how

In return, the licensee usually promises (a) to produce the licensor’s products covered by the rights; (b) to market these products in the assigned territory; and (c) to pay the licenser some amount related to the sales volume of such products. It may be noted that the licensee markets the products of the licenser in addition to producing it, whereas contract manufacturing covers only manufacturing.

Advantages of Licensing Arrangement

1. Licensing arrangement does not involve any capital outlay on the part of the licenser;

2. This is a very quick and easy way to enter the foreign market;

3. By this method, the licenser gains easy access to knowledge about the local market;

4. Licensing normally gains local government approval more quickly than foreign manufacturing because of inflow of technology with very little cost and strings; and

5. Licensing also has other advantages such as savings in shipping freight, avoidance of tariff and non-tariff barriers, etc.

Disadvantages of Licensing

1. As in the case of contract manufacturing, there is a possibility that the licensee might become competitor to the licenser in the long run;

2. The return normally in licensing is limited as compared to other forms of investment;

3. It is difficult to exercise much control on the licensee.

2.4 Joint Ventures

Joint Ventures are very much like licensing arrangements, but in the former the international firm has, normally, equity participation and management voice in the local firm.

Advantages of Joint Ventures:

As compared to the earlier three forms of overseas investment, joint venture has the following advantages:

1. Potentially greater returns from equity participation as opposed to royalties;

2. Greater control over production and marketing;

3. Better market feedback; and

4. More experience in international marketing.

Disadvantages of Joint Ventures:

The disadvantages of Joint Ventures as compared to licensing, contract manufacturing and assembly are:

1. Joint Ventures involve greater risks; and

2. They also involve greater investment of capital and management resource.

As compared to 100% ownership, joint ventures (a) require fewer capital and management resources and thus this arrangement is open to smaller companies, (b) a given amount of capital can be spread over many countries, and (c) the danger of appropriation is less, since a national partner is involved in a joint venture.

On the other hand, there is a possibility of conflict of interest with the national partner.

2.5 Wholly-Owned Foreign Production

Wholly-owned foreign production involves greatest commitment to a foreign market. More than complete ownership, it gives complete control over all the activities of the firm.

There are two ways in which one can acquire 100% ownership in a foreign country. They are (a) acquiring an existing foreign production unit, and (b) developing one’s own facilities from scratch.

2.5.1 Acquisition

Acquiring a foreign company with all its resources is a much quicker way to enter a market than developing one’s own facilities. Acquisition means getting qualified management personnel and labour, gaining instant local knowledge and contract with the local market and government and, most of all, removing a potential competitor from the scene.

2.5.2 Establishment of a New Facility

A firm normally builds up its own facilities from scratch where (a) it does not find a national producer willing to sell out or the national government does not allow it and (b) there are no local firms having the requisite standard of facilities. Establishment of its own set up helps the firm to incorporate the latest technology and equipment and avoids the problems of trying to change the traditional practices of the local firm.

Advantages of wholly owned operations are:

1. 100% ownership means 100% profit

2. Greater experience in international operations;

3. No scope for conflict of interest with any local party; and

4. Complete control leading to better integration of various national organisations into a synergistic international system.

Disadvantages of wholly owned operations are:

1. They are costly in terms of capital and management resources;

2. They may result in negative public relations;

3. There always is the possibility of expropriation by the host government; and

4. Lack of involvement of a national partner who might act as a bridge between the international firm and the country concerned.

In conclusion, it might be said that there is no one best way to enter foreign markets. A firm, intending to enter foreign markets, should analyse carefully its strength and weaknesses and the opportunities and conditions in each market before deciding about the type of entry. It should take the initiative on its own. Whatever the firm does, it should always follow a flexible policy ready to change with changes in environment.

2.6 OFFSHORE SOURCING, SUB-CONTRACTING AND MANUFACTURING

Although imports have always been important in some sectors, companies in more and more industries find offshore sources of components and finished products a means of increasing their profitability. As offshore sourcing has spread across industries, it has also spread to countries in Asia, South America and other developing areas.

The motivations for offshore sourcing are usually to obtain lower-cost products.

Selecting the form of Offshore Sourcing

Offshore Purchase

This is a relationship between independent buyers and sellers in which goods are exchanged for money.

Offshore sub-contracting

This term covers many different relationships between independent companies in which the buyer is more involved with the source than in a simple buyer-seller relationship. The buyer may provide detailed product specifications, technical assistance, raw materials or needed components or even some financing to the foreign manufacturers.

Joint Venture Offshore Manufacturing

This relationship involves the joint ownership with a foreign company of an offshore manufacturing enterprise.

Controlled Offshore Manufacturing

This relationship is that of a parent and wholly-owned foreign operation, generally a subsidiary corporation that supplies the parent’s needs for a product.

Selection Criteria

Four important selection considerations are:

Company capabilities and resources

Availability and capabilities of suppliers or partners

Projected sourcing volumes and variability

Degree of integration of offshore sourcing with other operations.

Company Capability and Resources:

Different forms of offshore sourcing demand different abilities on the part of enterprises and vastly different commitments of resources. Simple offshore purchasing requires little experience or investment, whereas controlled offshore manufacturing requires a considerable commitment of investment capital and management time.

Availability and Capabilities of Suppliers or Partners:

Whether acceptable suppliers and/or partners are available depends on the country, on the complexity of the production requirements, and on the size of the proposed operation. Small operations for relatively simple products may have a wide choice of suppliers or partners, whereas larger investments for more complex products will be more limited in this respect. This partly explains why more controlled offshore manufacturing exists in electronics than in the apparel industry.

Evaluating Products for Offshore Sourcing

Main Cost Tradeoffs

o Labour

o Materials and Components

o Factory Overhead

o Corporate Overhead

o Shipping and Duties

Products Available for Offshore Sourcing

o Labour Intensive Products

o Standardised Products

o Products with a predictable sales pattern

o Products that are easy to ship and face low import duties

Evaluating Sources and Partners

Capabilities for manufacturing and delivering acceptable products on time and acceptable costs

Willing to be good long term suppliers

A partner is expected to bring to the venture considerable expertise in addition to its capital investment.

The Selection of an International Market Entry Mode:

An SME needs to critically examine several factors while selecting the most appropriate entry mode for international markets. The major factors which need to be examined are as under:

Market size

Market growth

Regulatory framework

Structure of competition

Level of risks.

These factors should be carefully evaluated considering the willingness and strength of the organisation to commit its resources for global expansion. Since in the initial phase a company entering into the

international market on the basis of its competitive strengths in technological and managerial skills, it may choose to enter by using multiple entry modes in different markets. Opportunistic market entry modes such as International Sub-Contracting and subsidiary routes may be looked into for markets with high entry barriers and high competitive intensity. For countries with substantial market size and high growth rate, a firm may consider using Strategic Alliance and Joint Venture for market entry. However, an in-depth detail analysis is required for the firm before a final decision is taken on an international market entry mode.

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