modes of international market entry
TRANSCRIPT
FACTORS AFFECTING THE SELECTION OF ENTRY MODE
EXTERNAL FACTORS
INTERNAL FACTORS
Market size Market growth Govt. regulations Level of competitionPhysical Infra structure Level of risk –political, economical ,operational Production and shipping cost
Company objectives Availability of company resource Level of commitment Internal experience Flexibility
External FactorsMARKET SIZE:Large market size justify the mode of entry
with long term commitment requiring higher level of investment like wholly owned subsidiaries or equity participation
To take advantage of market size number of Indian companies are in the process of committing more resources to the Chinese market
Ex Ranbaxy entered Chinese market in a joint venture and emerged as a market leader with the brand Cifran
External FactorsMARKET GROWTH Most of established markets
likeUSA,Japan,Europe has reached a point of saturation for consumer goods such as automobiles ,consumer electronics like TV, fridge, washing machine etc so the growth in these countries is showing declining trend.
Firm invests in markets with high growth potential such as China ,India ,Thailand ,Indonesia etc .these are called as emerging markets
External FactorsGOVERNMENT REGULATIONS : The selection of market is greatly influenced by the
legislative framework of the overseas market Govt in gulf countries has made it compulsory for foreign
firms to have a local partner. UAE is a lucrative market for Indian firms but most firm
operate there with a local partner Trade barriers such as ecological regulations affect mode
of entry .this major reason for increased FDI in Mexico which is part of NAFTA(north American free trade agreement)
To cater US market . Japanese automobile firm set up their units in the European Union mainly due to high tariff on automobiles that foreign firms were forced to set up manufacturing units especially in the automobile sector in china
External FactorsLEVEL OF COMPETITION Presence and involvement of competition in an over
seas market is crucial factor in deciding on entry mode .
Ex In auto companies setting up their operations in India and other emerging markets so as to effectively respond to global competition .
PHYSICAL INFRA STRUCTURE Level of development of infrastructure like roads
railways, metros , telecommunications, FI, and marketing channel is a pre condition for a company to commit more resources to an overseas market
Countries like Singapore, Dubai, Hongkong see major investment only because of infrastructure development
EXTERNAL FACTORS
LEVEL OF Risk There are 3 types of risks 1. Political risks : Political instability and turmoil dissuades the
firms from pouring in more resources to the market .
Companies invest more in countries with a stable Govt. and transparent legal systems
The political system in developed countries like USA, UK , Japan , Australia is more less stable
Political system is highly instable in countries like Iraq,Pakistan,Fiji, Argentina , Brazil etc
External Factors2.ECONOMIC RISKS :
Economic risk arise due to volatility of exchange rates of the target markets currency , upheavals in balance of payment situations that may affect the cost of other inputs for production , and marketing activities in foreign market
International companies find it difficult to manage operations in markets where inflation is very high .
As seen in countries like Brazil , Argentine so most Companies prefer to enter these markets by way of licensing and franchising rather than equity participation.
Firms invest more in those countries with higher economic stability
3.Operational risk
External FactorsOPERATIONAL RISK :If the marketing system in an over seas
country is similar to that of the firms home country, the firm has a better understanding of operational problems in the foreign market in question
Ex. The absence of organized retailing system in India provides Indian exporters a strategic edge when operating in other developed countries , which do not have organized retailing system
External FactorsPRODUCTION AND SHIPPING COSTSMarkets with substantial cost of shipping
as in case of low value high volume goods may increase the logistics cost .
The increased chipping cost may not only be due to the longer distance but also because of lack of availability if competitive shipping lines as I case of shipping goods from India to most African and Latin American countries
INTERNAL FACTORSCOMPANY OBJECTIVES:
Cos entering international market with an reactive approach to international marketing opportunities
In such cases Co. receives unsolicited orders from acquaintance ,firms and relatives based abroad and they attempt to fulfill these export orders
Strategic objective of proactive co make them enter into international markets through investment modes of entry
INTERNAL FACTORS AVAILABILITY OF COMPANY
RESOURCES Entering IM need substantial commitment
from financial and human resource and therefore the choice of an entry depends on the strength of financial strength of the firm.
Ex . Indian firms with good financial strength have entered the International market by way of wholly owned subsidiaries or equity participation
INTERNAL FACTORSLEVEL OF COMMITMENT :WRT market potential , the willingness of the
company to commit resources in a particular market also depends on the way the co is willing to perceive and respond to competitive forces .
Companies need to evaluate various investment alternative for allocating scare resource
INTERNATIONAL EXPERIENCE :A co well exposed to the dynamics of the
International marketing environment would be at ease when making a decision regarding entering IM with a highly sensitive mode of entry such as JV and wholly owned subsidiaries
INTERNAL FACTORSFLEXIBILITY :Companies should keep in mind exit
barriers when entering international markets
A market which presently appear attractive may not necessarily continue to be so say next 20 years.
There could be changes in political, legal, structures and changes in customer preferences so markets may be favorable now may show exit over a period of time so need to be approached by way of strategic alliance
Modes of international Market entry
The approach to international expansion a company chooses based on desired control and on the risk it can afford .
Indirect exporting An export entry mode where by a company sells
its products in the company's home country to intermediaries who in turn sell the product overseas
Middle man can be used such as export management companies ,trading companies, agents or brokers
These manage distribution operations in Int.markets
Eg. Merchant exporter
Cooperative exporting/piggy backing/mother Henning Using the distribution system of exporters
with established systems of selling abroad who agree to handle the export function of a non competing company on a contractual basis
Such companies are paid on commission or are charged a discount price for the product.
They are larger companies with extensive experience in and knowledge of target international markets .
PIGGY BACKINGIn PIGGY BACKING the company exporting is known as rider with inadequate experience of operating marketing channels and uses a foreign company which has an established distribution network in the foreign markets known as carrier
Direct ExportAn export entry mode where by a firm
handles its own exports usually with the help of an in-house exporting department.
Such companies have more control over the marketing mix in the target market.
They make sure that the wholesale and the retailer observe the companies marketing policies ,charging the suggest sales price , offering the appropriate promotions and handling customer requests promptly and satisfactorily.
Direct exporting Companies bear the cost involved in selecting
and monitoring the different intermediaries involved in distribution, freight forward, shipping lines , insurers , and retailers.
Co bears the cost for marketing service providers, such as consultants , marketing research and advertising companies .
One ex for opening new opportunities for direct exporting is internet .
Some co do catalogue retailing and dot.com companies , like Amazon etc
Licensing An international entry mode that involves a
licensor, who shares the brand name, technology and know how's with a licensee in return for royalties .
Licensor : the owner of a product license who agrees to share know how's , technology , and brand name with the licensee in return for royalties .
Licensee: the purchaser of the license who pays royalties to the licensor for the rights to use the licensors technology , know how's and brand name
Licensing Licensing presents more risk to the Co. but
offers more control than exporting .It involves a licensee and a licensorThe licensor offers know how's , shares technical
information, and often shares a brand name with the licensee
The licensee performs following functions :Production of the licensors products covered by
rights Marketing these products in the assigned
territory Paying royalties to the licenser for using the
intellectual property
Licensing with out name The product mfged under license are of
highest quality When quality cannot be maintained it is
desirable for products produced under license not to carry the licensors brand name
Example In Italy fiat granted licensee to Avto VAZ
Russia’s largest automobile manufacturer lada.
France Renault granted license to build Dacia brand automobiles in Romanian
Licensing advantages It is lower risk entry mode It permits the Co access to market that may
be closed or may have high entry barrier In the event of natural disaster or Govt.
takeover , the licensor licensing without name incurs only loss of Royalties
The licensor that permits the use of the name may suffer loss of reputation in the short term if the product s are mfg without licensors supervision / if they do not uphold licensors standard .
Licensing advantagesIt facilitates rapid penetration in international market
for technology intensive products and process.Provides access to markets with high level of tariff and
non tariff barriers .It reduces political and economical risk associated with
international markets and therefore provides opportunities to venture into more sensitive markets
It helps the international licenser to rapidly expand into international markets and amortize the expenditure incurred on R&D
In case of developed and developing countries where forged products are in high circulation in the market , licensing helps in curtailing the duplicate products market.
Contractual entry mode A company may enter international markets using
synergistic effect of a partner firm and make use of its resources .
This is mutually beneficial for both the firms as it provides them access to new technology and markets .
Firms having high tech products or +manufacturing facilities but no access to foreign market may use a foreign partner that is well established and has got a strong distribution and marketing network in the foreign market
Example:Tata tea ltd which is one of largest tea companies in
the world now had entered into contractual entry mode with Tetley group in UK which had strong presence in Europe, US and Australia
Consortia Consortia involves 3 or more companies Ex consortia involves some companies
with a substantial percentage of Govt. ownership is Air Bus Industries .airbus is an international consortium involving France (Aerospatiale with a 37.9 percent ownership),the UK (British aerospace with a 20 % ownership), Germany (Daimler Chrysler DSA subsidiary , with a 37.9 percent ownership ) Spain with 4.2 % ownership
Wholly owned subsidiary The entry mode that affords the highest
level of control and present the highest level of risk to a company , it involves establishing a new company that is a citizen of the country where the subsidiary is established.
Co can over come some of the disadvantage offered by partnering with other firms by setting wholly owned subsidiaries
Wholly owned subsidiary Assumptions of wholly owned subsidiary 1. The company can afford the costs
involved in setting up a WOS.2. The Co is willing to commit to the
market in long term 3. The local Govt. allows foreign
companies to set up WOS on its territory.
Wholly owned subsidiary Companies can develop its own subsidiary ,
referred to as Green field, which represents a costly proposition , or it can purchase an exisisting company through acquisitions or mergers
Govt have been de socializing services and industries , rapidly privatizing industries that were formerly Govt owned or operated
Ex opportunities in areas like telecommunications ,health care ,energy etc
Wholly owned subsidiary Advantages Provide relative control of company
operations in the target market .Control on how to handle revenue and profits It also carries greatest level of risk .Ex In case of Daimler Chrysler , Daimler found
that Chrysler was not performing up to the par and quickly proceeded to restructure , weeding out the former Chrysler employees .
FRANCHASINGFranchising is a mode of entry for the service industry
and it is the service industry equivalent to licensing .Ex service sectors like healthcare, personal
wellbeing ,education training , specialty retailing etc
The FRANCHISER known as home company gives the FRANCHISEE or overseas company intellectual property and other assistance over an extended period of time
OR the right to use its brand name and all relate trademarks
and its business know how's such as secret recepies and customer interfacing technique, the franchisor may also provide the franchisee with advertising and sales promotion support – all in return for royalties
FRANCHASINGThere are 2 parties involved like licensing
Franchiser and franchisee .Franchisee acquires the right to market the
producers products and services in a prescribed fashion using the franchisers brand name , processing and production methods and marketing guidelines.
He pays royalties in terms of money Franchiser- who gives the franchisee the right to
use brand name and all related trademarks and its business know how's such as secret recepies and customer interfacing technique, in return for royalties.
FRANCHASING ADVANTAGES Franchising is a form of licensing where
in transfer of IPR takes place .It is a low cost and low risk mode of
entry It provides firm opportunity to rapidly
penetrate overseas where it has little market knowledge and strength
Transfer of knowledge is an on going process
Co exerts high control franchisee operations which ensures uniform quality and service standards across markets
DISADVANTAGE -FRANCHASINGThe franchisers some times find it difficult to coordinate and
control a large number of franchises In many developed and developing countries the concept of
franchising hardly exists .And international marketers find it difficulty to identify and
select franchising partners In major countries franchising associations and their websites
provide useful service information Ex McDonald's restaurants in France often found a quick copy
cat setting up around the corner Ex – McDonalds , Carrefour hypermarket ,pizza hut ,
KFC ,Benetton are international franchising Benetton- the franchiser need to achieve minimum sales target
follow marketing guide lines , and must adhere to standard shop layout. However the franchiser are not required to pay any franchising fees .
JOINT VENTURE When a firm is willing to take complete
control of its overseas operations in the international markets , it opts for equity participation with an over seas firm
A JV involves more than 2 firms in equity participation
In JV the 2 or more companies involved provid a complementary advantage for formation of a new company .
Thus in JV the participating company contribute their complementary expertise and resources
JOINT VENTURE The basic difference between a JV and strategic alliance
is that unlike JV a SA has no equity participation from 2 firms .
Reasons for forming JV :To over come FI barriers specially in Developing and
least developed countries .To manage the emerging new opportunities with
complementary technology or management skills provided by JV.
To over come operational barriers i.e. establishing contacts with Govt and local officials
To achieve competitive advantage in global operations with low investments
JOINT VENTURE BENEFITS Provide access to international markets
with high tariff and other import barriersProvide access to the strengths of local
firms including their supply chain and distribution channels in foreign markets.
Provide instant access to operational knowledge so that company has perception of being local in foreign markets
Reduce political and economic risks
JOINT VENTURE BENEFITS Provide opportunities to Indian firm with
strength in technical and process know how's to enter international markets
Provide access to foreign capital market.Facilitate shifting of manufacturing
operations to low production countries.Provide greater control over production
and marketing functions Facilitate firms to strengthen their
competitive position in International markets
JOINT VENTURE DISADVANTAGES Greater risk as compared to modes of entry without equity participation.
Conflict between partners may adversely affect a joint venture’s performance
STRATEGIC ALLIANCES All joint ventures and licensing and franchising
agreements are considered to be strategic alliances between companies attempting to reach joint corporate and market related goals.
This address to those formats which are short term in nature and that do not entail same level of commitment as the previous categories
Such alliances crop up frequently and have various forms and degree of alliance
They vary from a contract manufacturing agreement that requires the contracting firm to provide raw material and training to the contracting factory in return for production that could last for 2yrs for an exchange of loyalty points between companies
ACQUISITION An Indian company can acquire a foreign
company and all its resources in a foreign market.
Acquisition provides speedy access to the resource of a foreign company such as skilled manpower ,the Co’s products and brand ,and its distribution channel .
Opportunistic JV often happens with a acquisition of a weaker firm with a stronger partner
Ex of acquisitions Tata motors with Daewoo ,Korea worth 118
m $.Reliance with flat telecom in Bermuda worth
207 m US $ Wipro with nerve wire USA worth 18.7
million $
TYPES OF STRATEGIC ALLIANCES 1.MANUFACTURING ALLIANCE 2.MARKETING ALLIANCE 3. DISTRIBUTION ALLIANCE
1.MANUFACTURING ALLIANCE A no equity relationship between 2 firms , in which
one firm handles the others manufacturing or some aspect of the manufacturing process
M.A covers many types of alliances from contract manufacturing to technological ,engineering, and Rand D alliances
Ex MA between the US company Motorola Inc. and Singapore Flextronics International ltd .
Flextronics has manufacturing contracts for infrastructure and cell phones
Porsche has engaged in different type of technical alliance with Harley Davidson, helping to develop low noise ,low emission motorcycles .
Porsche is helping Harley Davidson to develop its water cooled revolution engine
2.MARKETING ALLIANCE A no equity relationship between 2
firms , in which one firm handles the others marketing or some aspect of the marketing process
Marketing alliance focus on all aspects of marketing
Ex Opel the German subsidiary of US auto manufacturers general motors signed a 2 year contract of to market its automobile to 6.5 million American online subscribers in Germany
3. DISTRIBUTION ALLIANCE
A no equity relationship between 2 firms , in which one firm handles the others distribution or some aspect of the distribution process
Ex mitsui and Mitsubishi has set up distribution alliances with coca cola in Japan , bottling and distributing all coke products in the market