entry mode
DESCRIPTION
Methods of Entry Modes.TRANSCRIPT
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Case: Diebold
Began to sell ATM machines in foreign markets in 1980’s 1980’ Di t ib ti t ith Phili1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebold’s total1997 foreign sales 20% of Diebold s total revenues Diebold decides to go it alone with local
f t i f l l t i timanufacturing presence for local customization Through acquisitions joint venturesj
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Basic foreign expansion entry decisions
A firm contemplating foreign expansion must make three decisions Which markets to enter When to enter these markets What is the scale of entryWhat is the scale of entry
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Which foreign marketsg
FavorableFavorable Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or private-sector debtdebt
Unfavorable Politically unstable developing nations with aPolitically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing
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Timing of entryg y
Advantages in early market entry:Advantages in early market entry: First-mover advantage. Build sales volumeBuild sales volume. Move down experience curve and achieve cost advantage. g
Disadvantages: First mover disadvantage - pioneering costs. g p gChanges in government policy.
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Scale of entryy
Large scale entryLarge scale entry Strategic Commitments - a decision that has a long term impact and is difficult to reverselong-term impact and is difficult to reverse. May cause rivals to rethink market entry. M l d t i di titiMay lead to indigenous competitive response.
Small scale entry: Time to learn about market. Reduces exposure risk.
TYPES OF STRATEGICALLIANCESALLIANCES
EQUITYALLIANCES JOINTALLIANCES
NON EQUITYALLIANCES
VENTURES
Entry modesEntry modes
1.Non Equity Based Modes1.Non Equity Based Modes• Exporting • Counter trade• Counter trade• Sub Contracting/
T k P j t• Turnkey Projects • Licensing • Franchising • Management Contract.
2. Equity Based Modes
• Wholly Owned SubsidiariesWholly Owned Subsidiaries
1 A i iti / With Alli• 1. Acquisitions/ With Alliance• 2. Green field / Without Alliance
1 EXPORTING1. EXPORTING
1 DIRECT1.DIRECT ADF, Raymonds, Shaw wallace
2. INDIRECTEX-Himalaya Publishing House, baskins
Robbins initially exported its Icecream to y pRussia till 1990 & later on opened outlets and later on established a plant in 1995.p
• 3 Intra Corporate Transfers3. Intra Corporate Transfers• Selling the products by a co. to its affiliated
co in host countryco. in host country.
• Ex. Selling of products by HLL to Unilever in USA.
2. Counter trade
• Arrangements whereby the flow of goodsArrangements whereby the flow of goods or services in both directions is an integral element of the specific terms of theelement of the specific terms of the business transaction.
• Ex Pepsi in USSR• Ex- Pepsi in USSR• The first form is barter .• The second type is counter purchase.
Contract ManufacturingContract Manufacturing• Contract manufacturing is outsourcingContract manufacturing is outsourcing
entire or part of manufacturing operations.
Ex-1. Nike has contracted with a nos. of factories in south East Asia tofactories in south –East Asia to manufacture its athletic footwear .2 B l h i h l2.Bata also has contracts with several cobblers in India to produce footwear's & it
kconcentrates on mktg.
Turnkey Project• A Turnkey contract is a contract under which
fi t f ll d i t t ia firm agrees to fully design, construct, equip a manufacturing or a service facility & hand it to purchaser/contracting party when it isto purchaser/contracting party when it is complete.
Exporter of a turnkey project may beExporter of a turnkey project may be – Contractor that specializes in designing and erecting
plants in a particular industry – Company that wishes to earn money from its expertise – Ex- Nuclear power, oil refinery, national highways,
railway lines etcrailway lines etc.– BT,BOT, BOLT
Turnkey ProjectTurnkey ProjectCompany designs constructs and testsCompany designs constructs and tests
++ Firms specialize in coreFirms specialize in core
Company designs, constructs, and testsCompany designs, constructs, and testsa production facility for a clienta production facility for a client
AdvantagesAdvantages++ Firms specialize in coreFirms specialize in core
competencycompetency++ Nations obtain infrastructureNations obtain infrastructure
projectsprojects
–– Politicized processPoliticized process–– Create competitorCreate competitor
DisadvantagesSDisadvantagesS
LicensingLicensing
-A contractual arrangement: one firm sellsA contractual arrangement: one firm sells access to its patents, trade secrets, or technology to another gy
– Licensee pays fixed sum and sales royalties (2%-5%) ( )
– Cross Licensing( In Pharma Co.)– Ex- Fuji Xerox , Nike entered by licensing to j , y g
Sierra Indstrl. Ltd.
What the Licensor Delivers to the Licensee in Complex Licensing Agreements
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What the Licensor Delivers to the Licensee in C l Li i A tin Complex Licensing AgreementsComplex Licensing Agreements
A t t d d t iA patented product or service
A trademark or trade name
Manufacturing techniques
Proprietary rights generally referred to as company or industry p y g g y p y yknow-how Supply by the licensor to the licensee of components or
i tequipment
Technical advice and services of various sorts
Marketing advice and assistance of various sorts
LicensingLicensingCompany owning intangible property (licensor) grantsCompany owning intangible property (licensor) grants
++ Finance expansionFinance expansion
Company owning intangible property (licensor) grantsCompany owning intangible property (licensor) grantsanother firm (licensee) the right to use it for a specified timeanother firm (licensee) the right to use it for a specified time
AdvantagesAdvantages
pp++ Reduce riskReduce risk++ Extend obsolete productsExtend obsolete products++ Upgrade technologiesUpgrade technologies++ Upgrade technologiesUpgrade technologies++ Avoid regulations of host country.Avoid regulations of host country.
–– Restrict licensor’s futureRestrict licensor’s futureRestrict licensor s futureRestrict licensor s future–– Reduce global consistencyReduce global consistency–– Potential competitorPotential competitor
P d t litP d t lit
DisadvantagesDisadvantages––Product quality Product quality
Franchising
Form of licensing in which one firm contracts with another to operate a certain type ofwith another to operate a certain type of business under an established name according to specific rules.according to specific rules.
– Major forms:-– 1 Manufacturer Retailer System- Automobile1. Manufacturer Retailer System Automobile– 2. Manufacturer Wholesaler System- Soft
drinks.drinks.– 3Firm Retailer System-Fast foods– 4 Reverse/Cross franchisees-ITC& ITT4 Reverse/Cross franchisees-ITC& ITT
Sheraton
FranchisingFranchisingCompany (franchiser) supplies another (franchisee)Company (franchiser) supplies another (franchisee)Company (franchiser) supplies another (franchisee)Company (franchiser) supplies another (franchisee)
with intangible property over an extended periodwith intangible property over an extended period
AdvantagesAdvantages++ Low cost and low riskLow cost and low risk++ Rapid expansionRapid expansion++ Local knowledgeLocal knowledge++ Local knowledgeLocal knowledge
–– CumbersomeCumbersome–– Lost flexibilityLost flexibilityDisadvantagesDisadvantages
• As you may or may not know, being a franchise is a legally defined term that contains three
l telements:
1. The use of a common trademark;1. The use of a common trademark;
2. The provision of operational support or assistance training or the e ercise of significantassistance, training, or the exercise of significant operating control;
3. The payment of a fee ( over and above the sale of the products at a bona fide wholesale price) -this would included initial fees royaltiesthis would included initial fees, royalties, advertising revenues, training fees, etc.
If we eliminate one of these elements, we id f hi lcan avoid franchise laws.
Take away the you will either have aTake away the trademark element,
you will either have a consulting agreement or a business opportunities / Management Contract
Take away the you have a trademark support, so that you offer the trade mark alone for a fee
license.
alone for a fee, Take away the fee a joint venture (sharing
profits)/ Agencyprofits)/ Agency
Licensing v/s Franchising
• usedTerm Royalty is normally used. Mgt. Fee is the term
used.Licenses are usually taken by established brands
It is resorted more by start up firms.
Production sector Service industryProduction sector Service industry.
Term of 16-20 years are common, 5-10 years are common
Licensees tend to self selected The Franchisee is selected
Licensee can often pass license to any other unconnected co. with little or no reference to licensor
Such replacement is selected by franchisor.
Concerns specific existing products with very little benefit being passed on to licensee
In this the franchiser is expected to pass on the benefits of ongoing research to franchisee.
Management ContractManagement Contract
Arrangement/ Agreement by which one firmArrangement/ Agreement by which one firm provides managerial assistance, technical
expertise, and other specialized services in all or specific areas to another firm for a certain
agreed period in return of monetary ticompensation.
1.A Flat Fee.2 P l2.Percentage over sales.
3.Performance bonus based on sales, production, fit bilit lit tprofitability quality measures etc.
Management ContractManagement ContractCompany supplies another withCompany supplies another withCompany supplies another withCompany supplies another with
managerial expertise for amanagerial expertise for aspecific period of timespecific period of timep pp p
AdvantagesAdvantages++ Few assets riskedFew assets risked++ Nations finance projectsNations finance projects++ Develops local workforceDevelops local workforce
DisadvantagesDisadvantages–– Personnel at riskPersonnel at risk–– Create competitorCreate competitorCreate competitorCreate competitor
Wholly owned subsidiaryy y
S b idi i ld b G fi ld• Subsidiaries could be Greenfield investments or acquisitions
Ad t– Advantages: – No risk of losing technical competence to a
competitorcompetitor – Tight control of operations. – Realize learning curve and locationRealize learning curve and location
economies. – Disadvantage:
• Bear full cost and risk
Mergers & Acquisitionsg q
• What is a merger???• What is a merger???• A Merger happens when 2 firms agree to
f d i l id tit thgo forward as a single new identity rather then remain separately owned & operated.
• This kind of action is more precisely referred to as a “ merger of equals”.
• Example-when both Daimler & Chrysler ceased to exist & DaimlerChrysler was ycreated.
What is an Acquisition ???q
When one co. takes over another and clearly establishes itself as a new owner.
From legal point of view the target co. ceases to exist & the buyer swallows the ybusiness .
Difference between the two concepts
When 2 firms together When one co. takesWhen 2 firms together form a new company
When one co. takes over another and clearly establishes itself as a new owner.
when a deal is made between two companies
In an unfriendly deal, where the stronger firm p
in friendly terms,g
swallows the target firm,
Mergers & Acquisitions DefinedMergers & Acquisitions Defined
Types of M&A Activity
FTC Categories
Vertical » suppliers or customers
Horizontal
Product Extension
» competitors
» complementary productsRelated
Market Extension
p y p
» complementary markets
Conglomerate » everything elseUnrelated
ReasonsReasons
• 1 Synergy1. Synergy• 2. Increases revenue/market share.
3 R t f• 3. Resource transfer.• 4. Economies of scale.• 5. Taxes
Few M&AFew M&A
• Coca Cola - PARLE PRODUCTSCoca Cola PARLE PRODUCTS.• Videocon – Daewoo.
Mitt l A l• Mittal – Arcelor• Tata- Tetley• Siemens- Osram• Ranbaxy- Daiichi SankyoRanbaxy Daiichi Sankyo
Joint Ventures
• When 2 or more firms join together to create a separate new entity that is legallycreate a separate new entity that is legally distinct from its parents.
• JV involve shared ownership• JV involve shared ownership.• corporate entity formed by international company
and local owners • corporate entity formed by two international
companies for the purpose of doing business in a third marketthird market
• a corporate entity formed by a government • EX TATA-TETLEY, PPP, M&M-Renault, MNAL
tetc.
Advantages: • Benefit from local partner’s knowledge. • Shared costs/risks with partner. • Reduced political risk. – Disadvantages
diff i t i d bj ti• differences in partner aims and objectives • equal ownership and different options can
slow decision makingslow decision making • dominance by one partner can lead to
resentment in the other • Large time commitment for education,
negotiation and agreement with partner
Green field / Without AllianceGreen field / Without Alliance
• It means starting with a virgin site and thenIt means starting with a virgin site and then working upon it.
• Starting from the scratch• Starting from the scratch.• The co. conduct the market surveys,
l t th l ti b l th l dselects the location, buy or lease the land, create a working unit, remit finances etc.
• When a form decides to expand beyond local borders.
• It may choose to create an entirely new y yorganisation as per its own specifications which lead to the pimplementation of a greenfield project. On the other hand, if it feels that it is necessary to speed up the entry process into international territory, then p yacquisition is the best alternative.
LNM- in JharkhandLNM in JharkhandMercedes Benz in AlabamaDi i P iDisney in ParisHyundai Motor Company in Czech Republic ( KIA car)
Acquisition and Green-field-pros & cons
PPro:Quick to execute Preempt competitorsPreempt competitors
Possibly less risky
Con:Con:Disappointing results Overpay for firm optimism about value creation (hubris)Overpay for firm optimism about value creation (hubris) Culture clash. Problems with proposed synergiesp p y g
GreenfieldGreenfield
Pro:Pro: Can build subsidiary it wants
Easy to establish operating routinesEasy to establish operating routines
Con:Sl bli hSlow to establish Risky
Preemption by aggressive competitors