Foreign Market Entry

• One of the most important decisions in IB is the mode of entering foreign market.

• Important foreign market entry strategies are as follows:• Exporting• Licensing/Franchising• Contract manufacturing• Management contract• Assembly operations• Fully owned manufacturing process• Joint ventures• Countertrade• Mergers and acquisitions• Strategic Alliances• Third country location

• Exporting • The most traditional mode of entering

international marketsExporting is the appropriate strategy when one or more of the following conditions prevail

• The volume of foreign business is not large enough to justify production in the foreign market.

• Cost of production is high• There are political or other risks of investment

in that country

• The market may not big enough in the long term

• Exporting is attractive when the concerned company has excess capacity.

• Also exports ensure that the company has other markets to cater when faced with stiff competition in home market or when home market reaches saturation levels.

• The two ways of exporting are• Indirect exporting• Direct exporting

• Direct exporting : refers to the sale in the foreign market directly by the manufacturer. The sale is directly to the foreign customer or through a middleman located in the foreign market.

• A number of organizational arrangements are available to a company for carrying on direct export.

• 1)Export department• 2)overseas sales branches • 3) establishing contacts with foreign

based distributors or agents

• Indirect export : Here the company transfers the responsibility of the selling job to some other organization .

• Advantages : • Firm doesnot have to build up an international infrastructure.• The risk involved is very less• Ideal for companies starting exporting for the first time• Also ideal for small sized companies

• Disadvantages• The development of overseas market depends to a very large extent

on the middlemen and not on the firm producing the export goods.

• The two alternative channels available for IE are• 1) International Marketing middlemen:

There are two important middlemen- merchants and agents. The basic distinction between the merchant and the agent is that the merchant takes title to the product he sells , while the agent does not.

• Export merchants: The domestic based export merchant buys the manufacturer’s product and sells it abroad on his own.

• Export/trading houses: They buy from domestic manufacturers and export abroad.

• Trading companies:they are into exports and imports for e.g Mitsubishi

• Agents /brokers

• 2) co-operative organizations: • Piggyback marketing : (allied company

arrangement or mother henning) – one manufacturer uses its overseas distribution facilities to sell the products of one or more companies including its own

Licensing and Franchising:

• The licensor issues a license to a foreign company to use manufacturing process, trademark, patent, trade secret or other item of value for a fee or royalty. The licensor gains entry at little risk, the licensee gains production expertise.

• Disadvantages: The licensor has less control over the licensee than it does over its own production and sales facilities.

• If the licensee is very successful, it has given up profits.

• Also when the contract ends, it could result in creation of a competitor.

• To avoid this licensor usually supplies some proprietary ingredients or components needed in the product (as coca-cola does)

• A number of foreign companies have entered the Indian market by licensing.

• IFB washing machine was manufactured under license from Bosch of Germany.

• Nike International ltd entered India by licensing to Sierra Industrial Enterprises. The licensee would take care of quality control, marketing and distribution operation and would pay Nike 5% royalty on ex-factory price on both footwear and apparel.

• Arvind Mills owns Indian marketing rights for leading US brands like Arrow, Lee and Wrangler.

• BAT (British American Tobacco Company) has given licenses in many countries for the manufacture of their brand “555”.

• In India ITC is the licensed producer of “555”

• Pepsi granted license to Heineken of Holland giving them the exclusive right to produce and sell Pepsi in Holland.

• Franchising is a more complete form of licensing.

• The franchiser offers a complete brand concept and operating system.

• The franchiser also supports in terms of training of employees, quality assurance and advertising.

• The franchisee invests the money and pays certain fees to the franchiser.

• McDonald’s has entered many countries by franchising their retail concepts and making sure that their marketing is culturally relevant.e.g

• In Holland they serve burgers with beer.• In India they cater to vegetarian tastes-

McAloo Tikki and McPuff.• Other examples are Dairy Queen,

Domino’s Pizza and KFC.

• NIIT and Aptech (SSI) have franchisees in Africa, South east Asia dn Middle east countries.

• Hotel chains like Hilton also operate the franchise way.

Contract Manufacturing

• Under contract manufacturing a company doing international marketing contract with firm’s in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product. This is a common practice in IB.

• There are a number of multinationals which employ this strategy in India.

• E.g. Park Davis, HLL, Ponds.• Samsung when it first entered India used Videocon

facilities for manufacturing their products. The marketing was done by Samsung personnel.

• Advantages: • 1) The company doesn’t have to commit

resource for setting up production facilities.

• 2) It frees the company from the risks of investing in foreign markets.

• 3) If idle production capacity is readily available in foreign country, it enables the marketer to get started immediately.

• 4) In many cases the cost of the product obtained by contract manufacturing is lower than if it were manufactured by the international firm.

• 5) It’s a less risky way to start by CM. If the business doesnot pick up sufficiently, dropping it is easy. But when you have your own production facility , the exit is difficult.e.g For many years Godrej Soaps manufactured Dettol for Reckitt and Coleman, Johnson’s Baby soap for J& J and Ponds Dreamflower and Cold cream for Ponds (HLL)

• Disadvantages• Less control on manufacturing so

quality could get compromised.• Big risk of developing potential

competitors• Loss of potential profits as the value

chain is not completely exploited.

Management Contracting

• The firm provides the management know-how and may or may not have an equity stake in the enterprise being managed.

• MC is a low risk method of getting into foreign market and it starts yielding returns right from the beginning.

• The arrangement is even more attractive if the contracting firm is given an option to purchase some shares in the managed company within the stated period.

• E.g. Tata Tea, Harrison Malayalam etc have contracts to manage a number of plantations in Sri Lanka

• Turnkey contracts• TC are common in IB in the supply, erection

and commissioning of plants as in the case of oil refineries, steel mills, cement etc.

• Ä turnkey operation is an agreement by a seller to a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller.

Fully owned manufacturing facilities

• Companies with long term and substantial interest in the foreign market establish fully owned manufacturing facilities.

• Advantages: • It provides the firm with complete control over production and quality • It doesnot have the risk of developing potential competitors as in the

case of licensing and contract manufacturing.

• Disadvantages• Cost of production could be higher in the foreign market.• There could be supply related problems like shortage of skilled

manpower, reaw materials• There could be union related or political problems.

Assembly operations:

• In this concept , the company ships the parts to the foreign country and only assembles the product there (taking advantage of the labour cost).

• The final product could be sold in the foreign country and/or also taken back to the home country.

Joint Ventures

• Any form of association which implies collaboration for more than a transitory period is a JV. Such a broad definition encompasses many diverse types of joint overseas operations

• Sharing of ownership and management in an enterprise• Licensing/franchising agreements• Contract manufacturing• Management contracts

• As per most experts JV encompasses joint ownership venture .

Joint Ventures• The essential feature of a joint ownership

venture is that the ownership and management are shared between a foreign firm and a local firm.

• In some cases more than two parties are involved. For e.g Pepsi’s Indian joint venture involved Voltas and Punjab Agro Industries Corporation.

• other e.g in India are • Maruti Suzuki and Hero Honda.

Strategic Alliances

• There are different types of alliances according to purpose or structure

• Alliances as per purpose are as follows

• Technology development alliances like research consortia , simultaneous engineering agreements

• Marketing, sales and service alliances in which a company makes use of the marketing infrastructure of another company in the foreign market for its products.

• Multiple activity alliance which involves the combining of two or more types of alliances.While marketing alliances are often single country alliances ,as international firms take on different allies in each country , technology development and operations alliances are usually multicountry since these kinds of activities can be employed over several countries.

Strategic Alliances

• Strategic alliances as per structure are

• Equity based (Joint venture) and b) Non-equity based.

• Non equity based alliances such as technology transfer agreements , licensing agreements, marketing agreements are proving to be more dynamic more constructive and more strategic.

• e.g The Star Alliance brings together 16 airlines –Lufthansa,United Airlines, Mexicana, Air Canada, ANA, Austrian Airlines, British Midland, Singapore Airlines, Tyrolean,Lauda,SAS,Thai Airways, Varig, Air NewZeland, Asiana Airlines and Spainair-into a huge global partnership that allows travelers to make nearly seamless connection to about 700 destinations.

Strategic Alliances

• Many strategic alliances take the form of marketing alliances . These fall into three major categories

• Promotional Alliances : One company agrees to carry a promotion for another company’s products or service. McDonald’s for e.g has often teamed up with Disney to offer products related to current Disney films as part of its meals for children.

• Logistics Alliances : One company offers logistical services for another company’s product. For e.g Abbott laboratories warehouses and delivers all of 3M’s medical and surgical products to hospitals across the US.

• Pricing Alliances: One or more companies join in a special pricing collaboration.Hotel and rental car companies often offer mutual price discounts.

Countertrade:

• is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by exports of goods , instead of money payments.

• Countertrade takes several forms. The following are the most common among them.

• Barter : In this system , goods and services are mutually exchanged between two countries depending upon their bargaining strength

• For e.g a countertrade deal between the MMTC and a Yugoslavian company involved import of 50,000 tonnes of rails of the value of about $38 million by the MMTC and the purchase by the Yugoslavian company of iron ore concentrates and pellets of the same value.

• Russia supplied newsprint and crude oil to India and India in turn supplied tea, garments, medicines to Russia.

Countertrade:

• Compensation deal : Under this arrangement , the seller receives a part of the payment in cash and the rest in products.

• Counterpurchase: Under the counterpurhcase agreement the seller receives the full payment in cash but agrees to spend an equivalent amount of money in that country within a speicified period.

• e.g Pepsicola’s trade with erstwhile USSR – Pepsi got paid in roubles for the sale of its concentrates in the USSR , but spent the amount for purchase of Russian products like Vodka and wine.

• Daimler-Benz sold 30 trucks to Romania. From Romania in exchange it got 150 jeeps.These jeeps were sold in Ecuador in exchange for bananas. The bananas were brought back by Benz into West Germany which was sold to a supermarket chain which finally paid them in Deutsch Marks.

• In early 1980s , Boeing exchanged 10 747s for 34 million barrels of Crude oil