International Market International Market Entry StrategiesEntry Strategies

Two Tier SystemTwo Tier System

Entry Strategies

Entry Modes

Determinants of International Market Determinants of International Market Entry StrategiesEntry Strategies

1. Geographical Location – Economic Environment:

• Economic System (Centrally Planned, Capitalist & Mixed Economy)

• Per Capita Income (Purchasing Power Capacity)

• Market Size (Large Population & Age factor)

• Inflation (Cost of Production is high, consumers’ income is reduced)

Political Environment:• Currency Inconvertibility (Host country

govt. enacts law prohibiting foreign companies from taking their money out of the country or exchanging the currency.

• Credit Risk (Refusal to honour a financial contract with a foreign company.)

• Conflict of Interest (Welfare of economy Vs. maximization of corporate wealth: tax revenue Vs. transfer pricing and balance of payment issues)

Cultural Environment:

• Language (‘Come alive with Pepsi’ in German ‘Come out of the grave’, American Motor’s Matador become killer in Spanish ).

• Cast and Religion (In Iran because of ‘Purdah’ system singer machines’ sales executive do approach husbands not wives).

• Material Element- It is related to Economic, financial and social infrastructure which is objected and enjoyed by people. (Example:

German like beer while French like wine.)

2. Timing of Entry – First Mover: First Entry in the international

market.

• Advantages: 1. Capture a customers’ demand by establis-

hing a strong brand name.

2. Build sales volume in that country and economical production as per economies of scale which led the average fixed cost downward that may enable the first mover to cut price below that of late mover and capture the market.

.

3. Create buyer switching costs that tie customers into their products and services. It is generally avail by first mover in consumer good market because of brand loyalty whereas late mover has to invest more to attract customer.

4. Accessibility of prime locations because of least

demand.

5. The ability to register patents and trademarks that will protect the first entrant from future competition.

• Disadvantages:1. Pioneering Cost – It includes the cost of

educating customer, cost arises due to learning rules and regulations of the host country. (KFC introduced American style fast food to Chinese, but late mover McDonald’s has capitalized the market in China.

2. First mover’s investment value diminishes if regulations of host country changes.

3. Scale of Entry and Strategic

Commitments –

• Large Scale implies rapid entry which involved the commitment of significant resources and a strategic commitment.

• It has both advantages and disadvantages:

• Advantage -

1. Large scale commitment gives both the customer and distributors reasons for believing that the company will remain in the market for the long run

2. The large scale of entry may also give other foreign institutions considering entry a little difficult, because other institutions have to compete with indigenous and this foreign institutions.

• Disadvantage:

1. Large scale entry involves much resources and cost whereby it limits expansion in other desir-able markets and also limit’s the company’s significant strategic flexibility.

2. Value and risks of the commitments associated with large-scale entrants is high which should be balanced it out by offering diversified product and services.

The JOLLIBEE Phenomenon-The JOLLIBEE Phenomenon-A Philippine MultinationalA Philippine Multinational

• It began operations in 1975 as a two branch ice-cream parlour.

• It later expanded its menu to include hot sandwiches and other meals.

• In 1981, it had 11 stores, on the other hand McDonald's began to open stores in Manila.

• To compete with McDonald Jollibee started analyzing weakness in McDonald’s business Model global strategy. As:

– MacDonald's fare was too standardized for many locals whereby local firm could gain share by tailoring its menu to local taste.

– Jollibee’s Competitive Strategy-• It offered food product based on local taste

as hamburgers of less spice blended into beef sweeter than those produced by McDonalds.

• It also offered local fare including various rice dishes, pineapple burgers and banana and peach mango pies for dessert.

• Leadership Position of Jollibee –• By 2003, Jollibee had 467 stores in the

Philippines• A market share of more than 50 percent • Revenue of about $ 500 million, on the other

hand McDonald had 237 stores.• In mid-1980s, Jollibee expanded internat-

ionally by localizing the menu to match local taste.

• The other strategy It had opted to establish outlet in a country where Filipino popula-

tion exits.

Entry Modes:

1. Trade Strategies - Direct Export:– The company sells goods directly to

customer or end-user in target market.

– There are also some goods like aircraft and similar industrial products where direct export is more convenient.

• Indirect Export :– The exporting company sells its good to

intermediaries or distributors or agents,

who in turn exports the product to end-users in target markets.

– In indirect exporting, distributors or interme-diaries are known as Export management companies (EMC), which sells goods on its

own account and assumes the trading risk.

If it acts as agent it charges a commission.

– Trading companies provide other services to exporters as storage facilities and finan-cing services. These company are common in Europe, South Korea and Japan.

• An EMC functions in foreign markets just as a sales representative or exclusive wholesaler functions for a

manufacturer in the foreign market.

• An EMC usually has a formal agreement with

manufacturers to "manage" their exports.

• EMCs operating on a commission basis will usually want a commission that equals - or even exceeds - your best domestic commission. This might range from 10% for consumer goods to 15% or more for industrial products.

• Advantages:1. Avoid substantial cost of establishing manufa-

cturing operations in the host country.

2. Firm may achieve experience curve and location economies and achieve scale economies by global sale.

Example: Sony dominated global TV market ,

Japanese automakers created demand in US

market.

• Disadvantages:

1. High Transportation Cost.

2. If the firm can realize location economies by moving production elsewhere .

3. Tariff barriers .

4. Lack of control over marketing representative.

A successful Exporting A successful Exporting Company : 3MCompany : 3M

• The Minnesota Mining and Manufacturing Co. (3M) US based , which makes more than 40,000 products including tape, medical products and Post-it notes.

• 3M remains a major exporter with $1.5 billion in exports.

• Export strategy of 3M is built around simple principle as “FIDO” (First In Defeat Others.)

• 3M export success was based mainly on three principle:

1.Enter on small scale with a very modest investment to reduce risk and pushing one product, such as reflective sheet for traffic signs in Russia or scouring pads in Hungary.

2.Add additional product lines once export of the one product is successful.

3.Hire locals to promote the firm’s products.

Counter Trade :• It is an alternative means of structuring an

international sale when conventional means

of payments are difficult because of non-convertibility. (Unable to convert home currency because of Govt. restrictions).

• It is based on barter like agreement as trade goods and services for other goods and services.

Example : • Phillip Morris ships cigarettes to Russia for

that it receives chemical that can be used to make Fertilizer.

• Phillip Morris ships the chemical to China and in return China ships glassware to North America for retail sale by Philip Morris.

• General Electric won a contract for $150 million electric generator projects in Roma-nia by agreeing to market Romanian produ-cts of the value of $150 million.

2. Contractual Agreements

• Contractual agreements are long-term, non-equity associations with a company

in foreign market.

• It involves transfer of technology, process-es, trademarks or human skills.

• Contractual Agreement are given below:

Licensing :• It is an agreement whereby a firm (licensor) transf-

ers the intangible property (patents, inventions, formulas, processes, design, copyright) to another firm (licensee) in foreign market and grant the rights to use the property for a specified period.

• In return, the licensor gets a royalty fee from licensee. It is common in manufacturing industries.

• Licensing can be cross, exclusive and non-exclusive

• Example: U.S Biotechnology firm Agmen licensed its key drugs, Nuprogene, to Krin in Japan and gained right to sell some of Kirin’s products in the US.

• Examples: • Xerox inventor of photocopier established joint

venture with Fuji and then licensed it xerographic know-how to Fuji later on which is known as Fuji-Xerox.

• In return, Fuji Xerox paid Xerox a royalty fee equal to 5 percent of the net sales revenue that Fuji Xerox earned from the sales of photocopiers based on Xerox’s patented know-how.

• In this case license was originally granted for 10 years and it has been renegotiated and extended several times since then. This was the case of exclusive licensing as Fuji Xerox’s sale limited to the Asian Pacific region.

• Advantages: – Requires little depth of market knowledge

– Requires relatively little investment

– Less risk is associated

– Entry is possible even unfavorable political environment is existing in host country

– The need for local market research is reduced

• Disadvantages:

– Can lose control over the core competitive advantage of the firm.

– The licensee can become a new competitor to the firm.

FranchisingFranchising • Franchising can be regarded as a particular

type of licensing.

• In this case franchiser (entrant) licenses a busin-ess system and other property rights (managerial assistance, trademark and copyright) to a franchi-see (host country entity) on royalty payment and commission (3-6%).

• Franchising encompasses transfer of the total business (staffing policy, product development, location and design.

• It gives greater control over the sale of the product in the target market. If franchisee fails to abide by the rules it can be taken back.

• Franchising is more common in service industries where the brand name is more important.

• Example:

• McDonald's strict rules as to how franchisee should operate a restaurant extend to control over the menu, cooking methods, staffing policy and location.

• It also organizes the supply chain for its franchisees and provides management training.

Turnkey Projects– In this case, a firm (contractor) agrees to constr-

uct an entire plant of a client in a foreign country and make it fully operational.

– It is known as turnkey project because contrac-tor is handed over the key of a plant that is ready for full operation to his client.

– These projects are most common in chemicals,

pharmaceutical and petroleum refining where all initial construction is more complex than opera-tion.

• Advantage:– This strategy is useful where FDI is limited by host-

government regulations.

– For example, the govt. of many oil-rich countries have set out their own petroleum-refining industr-ies and they restrict FDI in oil and refining sector. But because of lack of petroleum refining techn-ology in some of countries turnkey project are popular.

• Disadvantage:– The firm that enters into a turnkey project with a

foreign enterprise may create a competitor by selling its own technology.

3. Foreign Investment

Foreign Direct Investment

Portfolio Investment

Merger & Acquisition

International Strategic Alliance

Joint Venture

– When a firm invests directly in facilities to produce and market a product in a foreign country.

– FDI is very much concerned with the operation and ownership of the host country firm.

– As per US Department of Commerce and IMF, It occurs when

investor invests 10 percent or more in foreign business entity.

– In this case investor holds majority votes and have control on management and equity.

– Once a firm under takes FDI, it becomes (Multinational

enterprise) MNC.

Foreign Direct Investment

Portfolio Investment – It represents passive holdings of securities such

as foreign stocks and bonds or financial assets. – In this case the investor holds less than 10% of

the total shares or less than the amount needed to hold the majority vote.

– Some examples of portfolio investment are:

• purchase of shares in a foreign company. • purchase of bonds issued by a foreign government.

Theories of FDI

• Horizontal FDI: – When a firm invests in the host country firm in same

operation/product/industry what it has at home. – Most Japanese MNCs begin their international

expansion with horizontal investment because of less risk.

• Example:– Suzuki’s investment in India to manufacture

cars. – Starbuck’s acquisition of Seattle Coffee in

Britain

• Vertical FDI: It is found when a firm invests abroad in other

operations in terms of supply of inputs or to have control over marketing its products.

– Vertical FDI takes two forms:

• Backward Vertical FDI:– It is an investment in an industry abroad that

provides input for a firm’s domestic production process .

– Most backward vertical FDI has been in extractive industries (e.g. oil extraction, bauxite mining, tin mining and copper mining).

– The objective has been to provide inputs into a firm’s downstream operations (e.g. oil refining, aluminum smelting and fabrication, tin smelting and fabrication.

Example :• British Petroleum and (Refining)/ Royal Dutch Shell

(Oil Extraction company) .

• Aloca (North American Firm pioneered in smelting Aluminum)/ Alcan Caribbean Island firm which dealt with deposits of bauxite. Aloca and Alcan vertically backward integrated.

.

• Forward Vertical FDI: In this case investment takes place in a firm of host country that provides help in the sale of goods produced at home country.

Example:

Volkswagen entered the US market, it acquired a large number of dealers rather than distribute its car through independent U.S. dealers.

Type of FDIType of FDI• Green Field Investment in a start-up project,

usually for a major capital investment such as a production plant, a refinery or a port.

• This investment involves the establishment of a new operation in a host country (foreign country).

• The investment starts with a bare site in a green field.

• Green field investment takes place either through opening of subsidiary in host country or through financial collaboration (investment in equity capital of a host country firm) for new establishment.

Example Example

• Three "green field" airport projects where the concession agreements have already been signed.

• These are for the international airports at Bangalore and Hyderabad and Sikkim.

• The concessionaire for the Bangalore airport is a private limited company and the Government.

• The shareholders in this project include the Karnataka State Industrial Investment and Development Corporation with a 13 per cent equity, the Airports Authority of India (AAI) with another 13 per cent and the Siemens consortium (Siemens Projects Ventures, L&T, Unique Zurich airport) with a 74 per cent stake.

• .

• Brown Field Investment: • When a company or government entity purchases or

leases existing production facilities to launch a new production activity.

Example :• There are two "brown field" airport projects for Delhi

and Mumbai to be completed by 2010.

• GMR Infrastructure Ltd. led Delhi International Airport Ltd. (DIAL) and Airport Authority of India (AAI) are involved in this project holding 74% and 26% shares respectively based on model of public private partnership (PPP).

MergerMerger

• When two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated.

• In this case " Both companies' stocks are surrendered and new company stock is issued in its place.

• For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

• In practice, actual mergers of equals don't happen very often.

• Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition.

• A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies.

• But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Economic Classification of Economic Classification of MergerMerger

• Horizontal Merger: A merger occurring between companies producing similar goods or offering similar services.

• This type of merger occurs frequently as a result of larger companies attempting to create more efficient economies of scale.

• Example:• Merger of Daimler-Benz and Chrysler (Auto

Companies)• Merger of Pfizer and Warner Lambert in 2000.

(Drugs Companies )

• Merger of Exxon and Mobil in 1998 (Oil Companies)

• Vertical Merger: • A merger between two companies those are

having buyer and seller relationship.

• By directly merging with suppliers, a company can decrease reliance and increase profitability.

Example:

• A car manufacturer purchasing a tire company. • A cone supplier company merging with an ice

cream maker company.

• Conglomerate :

• It involves two or more firms in unrelated areas.

• In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct

business separately. 

• Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior manage-ment at the parent company.

Type of ConglomerateType of Conglomerate• Market-extension merger - When merged

companies sell the same products in different markets.

Product-extension merger – When merged companies selling different but related products in the same market.

Pure Conglomerate: The merged firms those are dealing with service (financial and managerial).

– Financial company manages the financial functions of other companies in the group.

– Managerial conglomerate combining the managerial activities of several firms under one roof.

• Example :General Electric.

• Primary business units: • GE Aircraft Engines • GE Commercial Finance • GE Consumer Finance • GE Consumer Products • GE Equipment Management • GE Industrial Systems • GE Insurance • GE Medical Systems • GE Plastics (production of military hardware and nuclear power

equipment) • GE Power Systems (production of turbines for nuclear reactors and

power plants) • GE Specialty Materials • GE Transportation Systems (runs diesel and electric trains) • NBC

• Daewoo Group :

• The group was reorganized into three big parts:

• Daewoo International,

• Daewoo Engineering & Construction Daewoo Corporation. It is active in many markets; the most important are steel processing, ship building and financial.

Acquisition Acquisition • One firm purchasing another - there is no exchange of

stock or consolidation as a new company.

• Acquisitions are often congenial, and all parties feel satisfied with the deal. However, there are two type of acquisition :

• Hostile : In this case acquiring company makes a sudden purchase of shares of the target company with a limited time. it is known as dawn raid.

• Friendly: In this case there are lot of negotiations, the deal is not disclosed to third party until it is finalized by signing a letter from acquiring company.

•

• Example : • Tata Corus deal, which pushed Tata from 55th

position to fifth position.

• Tata Steels has pledged $ 8.1 billion for the deal

• Strategic advantages for Tata Steels:

– Product Mix

– Geographical spread

Why Merger & Acquisition? Why Merger & Acquisition? • Synergy : It is the magic force that allows for

enhanced cost efficiencies of the new business. • Synergy takes the form of revenue enhancement

and cost savings, by merger & acquisition the companies hope to benefit from the following:

• Economies of Scale

• Staff reductions

• Acquiring new technology

• Improved market reach and industry visibility

International Strategic AllianceInternational Strategic Alliance• It is a form of affiliation that involves a mutual sharing

of resources for the benefit all of strategic partners without a change in control.

• Strategic alliances lie somewhere in between the Merger and the traditional acquisition.

• In this case , a “sharing” of resources and more than a passive investment by one party in another.

• The “sharing” of resources is to be mutual among the parties, focusing on the strengths of each.

• Strategic alliances take many forms as:

• Outsourcing a function by one party to another (marketing, warehousing or distribution agreement)

• Jointly performing a function (such as researching or developing a product or marketing products)

• Most developed form, a joint venture or partnership

• Some alliances are referred to as “equity alliances” because an equity investment by one is made in the other of the strategic partners. The equity may be “cross” with each investing in the other.

• Example:• General Motors (GM) has 20% share in equity of the

Italian firm FIAT and FIAT has 5% share in the equity of GM for marketing of each other’s product.

• Technology sharing agreement between Canon and HP in the copier business:

• Canon, which had developed the technology toner and toner cartridges, entered into an agreement to share that technology with Hewlett-Packard (HP), which had developed the software and computer chips to operate the cartridges and spurt the toner on product.

Joint VentureJoint Venture• A Joint venture (JVs) is participation of two companies in

the ownership, management and control of third enterprise designed to benefit both.

• The most common example of a "JV" (joint venture) is where a company that has a product, but no customer base, approaches another company that already has a customer-base and market share. Both companies will somehow complement the other

• The common joint venture is 50/50 venture, in which there are two parties, each of which holds a 50% owne-rship stake and contribute a team managers to share operating control.

Why Joint Venture?

1. Enhance Research and Development

2. Gain Access to key supplier

3. Enhance distribution Systems

4. Gain access to foreign market

• Example: Fuji-Xerox joint venture is holding 75% with 25% share of Xerox.

• The Man with the Billion-Dollar JV...

Bill Gates integrated his original "DOS" program (Microsoft) with IBM's already huge market share in personal and commercial computing.

• Gates negotiated a deal where IBM computers would come pre-installed with a Microsoft Operating system (MS DOS) - but under the condition that Microsoft would be entitled to lifetime upgrades for its software.

• Motorola entered into two new joint ventur-es in India to develop telecom and IT appl-ications and solutions.

• The venture partners include:

• Tech Mahindra (variety of mobile IT solutions)

• WiPro Technologies (IT Service arm)

Other Entry ModeOther Entry Modess• Consortia:

– Consortia is developed to pool financial and managerial resources to lessen risk.

• Subsidiary :• A company controlled by a parent company

through holding ownership share. • A parent and all subsidiaries is called group. • When ownership is not shared, it is known as

wholly owned subsidiaries. It could be Greenfield investment or acquisition.

•

• Example :

• Japanese camera maker Nikon has announced setting up a wholly-owned subsidiary in India with an aim to garner a substantial share of domestic market.

• It has atrget to capture market share of

compaq