global market entry strategies ban galore)
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Global Market Entry Modes
Prof. A.K. Sengupta
Former Dean, Indian Institute of Foreign Trade
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Global Market Entry ModesCommitment to Export
Analyse
Internal Factors
-Product
-Resources
External Factors
-Market Environment
-Competitive Profile
Decide on
International Market Involvement
Market Identification & targeting
Entry mode Selection
Marketing Mix
*Product*Price *Distribution *Promotion
Organise
Department
Subsidiary
Jt. Venture
Export House
Allocate Resources
*Product
*Arrange Resources
Export
Review
Modify
Set new target
Set Targets
Implement
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The Concept of International Market Entry
An institutional mechanism by which a firmmakes its products and services available to
consumers in overseas markets
Franklin Roots defines the market entry
strategy as a comprehensive plan which sets
forth the objectives, goals, resources and
policies that guide a companys international
business operations for achieving sustainable
growth in world markets.
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Once a firm has decided to establish itself in global market
it becomes necessary that the Company studies and
analyzes the various options available to enter theinternational markets and select the most suitable one.
This decision is to be taken with utmost careNot only isthe financial resources in stake but the extent to which the
companys marketing strategy can be employed in the new
market also depends on this decision.
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Mode of entry varies from low -risk ,low-control modes
with minimum resource commitment eg. indirect
exports to high-risk, high control modes with a higher
level of commitment by establishing its own
manufacturing facilities in foreign markets (subsidiaries).
Factors
i) The ability and willingness of the firm to commit
resources.
ii) The firms desire to have a level of control over
international operations.
iii) The level ofriskthe firm is willing to take
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Alternative Entry Modes
Production in Home Country Production in Foreign Country
Exports Providing Offshore
Services
Contractual Mode Investment Mode
Indirect Direct
OverseasAssembly or
Mixing
Joint Venture WhollyOwned
Foreign
Subsidiarie
s
InternationalLicensing
InternationalFranchising
TurnkeyProjects
ManagementContract
InternationalStrategic
Alliance
ContractManufacturing
Distribution
Access
Technology
Alliance
Production
Alliance
B & T BOT BOO
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Production in Home Country
Export
Entry
A firm has two basic options for carrying out export
operation.
--Market contacted through a domestically locatedintermediaryan approach called Indirect Exporting
--Market can be reached through an intermediary located in
foreign market--an approach termed as Direct Exporting
Indirect Export
--When firms do not have much exposure and has limited
resources Indirect Exports
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Indirect exports occur
-Selling to a domestic broker/ foreign buying agent in home
country
-Exporting through merchant intermediary-export house
Foreign firms having buying offices in IndiaTrading House
--Soga Shosha in Japan
--Export Management Company and Export Trading
Company in USA
--Commercializadoros in Latin American Countries
--Operateur Specialize en Commerce Exterior in France
--Trading Houses in India, Canada and Hong Kong
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Export Houses in India
Category Performance (in Rupees
One StarEx port House 15 Cro
Two StarEx port House 100 Cro
Three StarEx port House 500 Cror
Four StarEx port House 1500 Cror
Five StarEx port House 5000 Cror
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Market selection and market research
Customer identification and evaluation
Commercial and technical negotiations
Vendor development
Product/packaging adaptation
Imports, particularly of items required for expor
production
Provide protection against e
xport risk
Financial arrangements including securing credit
Export documentation and shipping
Functions of Trading Houses
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Direct Exports
A firms product is directly sold to importers-Sole
distributor
Foreign country based intermediaries--Agents
Company owned Sales Offices
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The basic duty of an agent is to secure orders in the name of and on account of the principaldoes
not trade on his owngets commission on the basis of orders secured.
Advantages of having agents
Exporting through Agents
Legal stipulation.
Local man-knowledge of the marketing conditions.
Good contacts with decision-makers. Set-up in major commercial centres-can call personally on main buyers at regular intervals.
Commercial and Trade information relevant to principals product line can be passed on by the
agent with greater speed.
Paid a commission-no fixed or overhead cost.
Well-established agents have warehousing facilities Has specialized sales staff to handle sales.
Can provide after-sales service.
Easier to appoint an agent compared to importer-distributor. Distributors lock up working capital of
product which does not move at the same rate as it was anticipated. An agent on the other hand
does not risk anything.
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Limitations of Agents
May work for other principals-competitors
For Technical products-may some time find difficult to keep himself informed of
their latest technical merits.
An agent may not put his best-fear the principal may start on his own.
Identifying Foreign Agents
Indian Embassies/High Commission.
International Merchant Banks.
Chamber of commerce.
Import Promotion Organisation.
International Union of Commercial Agents & Brokers at Amsterdam.
Visiting Trade Fair & Exhibitions.
Inserting Advertisement.
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Selection of Agents
Selection takes time and effort and calls for good judgment.
Three Qualities of Agents are:
1. Character : means the agent must have established his credibility.
2. Capital : must have sound financial base.
3.Capacity : must have contacts in the right places and possess adequate
marketing experience.
Other considerations
Question arises on big agency house or smaller one.
Answer depends on level of business the exporter expects to generate.
Small agents-may make sincere attempts to get business and will devote more
attention to promote companys product.
Disadvantage-may not have adequate contacts-lack of experience in promoting
technical & specialized products.
Another factor is to find out about competitive and complimentary product-for
complimentary products agents will have wide contacts.
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Appropriateness of Agents
How long has the agent been in business ?.
How many salesman has he got ?. Their age and experience. Does he carry any lines that are directly competitive with or complementary
to the firms line ?.
Total turnover during the last few years.
What is the average turnover per account ?. Has he got adequate working capital ?.
Motivating the Agents
Granting Exclusive Agency Rights
Variable commission rates
Supplying promptly promotional materials and samples
Invite agents to see companys operations first hand
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Evaluation of Agents
Share of the market the company has secured
How the market share changing?.
Annual rate of growth in sales
Number of new customers
Payment of Agency Commission
Purchase foreign exchange from the free market
Alternatively, he can maintain a foreign exchange account (EEFC)
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Export Agency Agreements
Agency agreement is a legal document which establishes the commercial
relationship between the principal and the agent.
It incorporates the conditions actually agreed upon by the concerned parties for
the conduct of business. When negotiating an agency agreement, the Indian firm
should be careful on certain points. These are :
i) Parties to the contract
ii) Contractual products
iii) Contracted territory
Hidden Commission
International buying groups may like to contact the exporter directly. Exportersshould reserve the right to negotiate directly with international buying groups in
his own country for orders which ultimately will be executed in the agents,
territory whether the agent will be eligible to commissions on such sales
should be made explicit in the agreement.
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Acceptance or Rejection of order
When credit terms are involved and the principal is not sure of the
credit worthiness of the buyer, he should have the right to reject theorder.
Very small order.
Payment of commission
Rate on which commission will be paid. Calculated on percentage basis the base for such calculation
The time when commission becomes payable-payable only on
realization as per RBI regulations.
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Settlement of disputes
Mechanism for settling disputes should be agreed upon in advance by
both parties and indicated in the agency agreement.
Referring the disputes to arbitration is the best procedure-venue and the
proper law of the agreement.
India as venue and Indian law as the proper law. If not acceptable to the
agent then: Two possibilities of compromise
a) Venue will be a third country
b) Place of defender
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Renewal and Termination
Agent is sound then no principal will think of termination.
Problem arises when agent is not effective.
Compensation to be paid to agent.
Minimum turnover clause in agreement.
Agent fails to reach the pre-determined level can be taken as valid
ground of termination.
No terminal compensation becomes payable.
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Company owned sales offices
Many companies ex port directly to their own salessubsidiaries abroad, side-stepping independentintermediaries
Sales subsidiary assumes the role of the independent
distributor by stocking the manufacturers products ,sellingto buyers, and assuming the credit risk
The sales- subsidiary offers the manufacturer full control
of selling operations in a foreign market
ExampleGeneral Motors exports its Saturn cars to Japanthrough two of its sales subsidiaries. It side stepped
Yanase, its Japanese importer. Its vigorous marketing effortmade it ossible to si n u 20 dealers in one ear.
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Production in foreign country
Contractual Entry
Licensing
A company assigns the right to a patent (which protects a product,
technology or process) or a trademark( which protects a product
name) to another company for a royalty
Licenser gives technology, manufacturing right, brand and also
marketing right (unlike contract Manufacturing)
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Licensee gains marketing right- Exclusive basis or
Unrestricted basis
Variety of time period 5 to 15 years
Licensee makes all capital investments
Licensing agreements subject to negotiation vary from
Co. to Co. and industries to industries
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Reasons for Licensing
Developed countries, enjoying competitive advantage in
proprietary technology and own majority global brands arebeneficiaries of international licensing--Shelved technology
A company may not have knowledge or time to engage
actively in international marketing
Market potential comparatively small
Limited resource- Company gains advantage with foreign
partner
Licensing saves capital- no additional investment is
necessary-but also no managerial resources needed
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Where political and economic risks uncertain-licensing
arrangement provides opportunities to venture into
sensitive markets
Facilitates rapid penetration in international market for
technology intensive products and processes
Provides access to markets with high levels of tariffs and
non-tariff barriers
Mattel Co of US licensing arrangement in Japan
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Disadvantages ofLicensing
Co has to depend on local licensee s marketing effort
Uncertainty of maintaining quality products by local licensee
Licensee may turn to be a competitor after expiry of license
Royalty is generally lower than profits 3-5 percent
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International Franchising
A special form of licensing in which a home company
(Franchiser) makes a total programme of operationavailable to an overseas company (Franchisee)
It includes the brand name, logo, products and method of
operation
Mc. Donalds, KFC, Burger King, Holiday INN, Hertz,
Carrefour, Benetton, Coca Cola (trade mark, recipe, and
advertising)-independent bottlers around the world
It is a transfer of the entire system from one country to
another
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Difference between Licensing and Franchising
Licensing Franchising
Royalty Management Fees
Products are major source of
concern
Covers all aspects of business
including goodwill, trade
marks, IPR etc
15-20 years 5/10 Years renewable
Licensing tends to be self selecting.
They are often established businesses
and can demonstrate that they are in a
strong position to operate the licensein question.
A licensee can often pass a license
to an associate with little or no
reference back to the original licensor.
The franchisee is selected by
the franchiser. Even
replacement is controlled by
franchiser.
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Concerned with specific
existing products and
technologies
Franchisor passes to the
franchisee the benefits of
on-going research programsThere is no goodwill attached
to the licensing as it is totally
retained by licensor
Although franchisor does
retain the goodwill, the
franchisee picks up an
element of localized
goodwill
Licensee enjoys substantial
measure of fee negotiation
Standard fee structure. Any
variation will cause
confusion
Lesser control Exerts higher control
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Overseas Turnkey Projects
Companies utilize technical ex pertise to enter
international markets
Types of Turnkey Projects
- Build and Transfer (Conceptualizes, designs,
builds, testing and transfer the project to the
owner
- Build/Operate and transfer (BOT) (Build the
project and manage for the contracted periodbefore transferring to the foreign owner)
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- Build, operate, own (BOO) (Firm buys the project,
once it has been built)
How turnkey projects are awarded
- Contracts for large scale turnkey projects are awarded
on the basis of competitive international bidding
- Projects are funded by international financialinstitutions ADB, world bank etc.
Air conditioning of Hong Kong airport, Etisalat
Building in Sharjah by Voltas, L&T, EIL
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International Management Contracts
Company provides its technical and managerial expertise fora specific duration to an overseas firm.
Low risk, low cost mode of entry.
Earn foreign exchange and optimally utilize its skilledmanpower
Good scope in Africa, Latin American countries and CIS
IOC manages aviation stations in Bhutan, Maldives
Oberoi Hotels in Africa
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Strategic Alliance
Refers to the relationship between two or more firms thatcooperate with each other to achieve common goals but do notform a separate company.
Firms focus on their core competencies
Difference between strategic alliance and joint venture
- In Joint Venture two partners contribute a fixed amount ofresources and the venture develops on its own
Joint Venture
Parent Company X
Parent Company Y
Company Z
(Joint Venture)
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-In strategic alliance each partner brings a particular skill or
resource usually they are complementary and by joining
forces each expects to profit from the others experience-No
equity participation
Company X
Strategic Alliance
Contractual
AgreementCompany Y
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Benefits of Strategic Alliance
Encourage cooperation with competitors to make use
of their specific strengths.
Cost of investment for market entry is shared
Give access to the distribution channels of partner
firms
Types of Alliance
Alliances involved either distribution access ortechnology transfers .
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Distribution Access
Exporter uses overseas distribution channel of another
firm
Ex porting company is known as a rider foreign
company with established distribution channel is
known as a carrier
Products are from unrelated companies that are
complementary (allied) but non-competitive A common
practice in piggy backing is that the rider retains its
branding. The market promotion activity is carried outwith mutual consent
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Advantages
Allows rider access to overseas market without
establishing own distribution channel
Gives rider a chance to learn and understand the entire
process which assists later setting up own channels
Helps carrier to fill up gaps in its own product line by
offering wider product range
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Limitations
Carrier concern about quality continuity of supply.
Rider handing over full control of distribution to
carrier which may not be compatible with firms long
term marketing goal.
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Examples
Wrigleys (US based chewing gum company) entered
Indian markets using Parrys distribution network.
Tanishq in India has company controlled retail outlets in
India has tied up with High Glow jewelry to use its retail
distribution channel in USA. Tata Motors launched its range of Indica cars in UK under
brand name City Rover using marketing channel of M G
Rover Group-which has strategic strength in marketing
having wholly owned sales organizations in Europeincluding U K .
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M G Rover identified the need to introduce a small carwhich would target the CITY Car sector- Tata Indica
fitted the Cos requirement as the basis of CITY ROVER
Smirnoff and Pepsi
Nestle has strategic alliance with Coca Cola to market its
Ready to- drink coffee and tea under brand namesNescafe and Nestea
Technology AllianceBiotech and Pharmaceutical industry
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Contract Manufacturing
An international firm arranges to have its
products manufactured by an offshore localcompany on contractual basis
Local manufacturers responsibility is only
production Marketing responsibility is on Parentcompany
No legal bindings change contracted
manufacturers to improve quality and costeffectiveness
A number of global companies outsource
manufacturing activities to low cost
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Globalization of business technologies and increasing
pressure on international firms to be globally competitive
in costs, product offering, speed to bring new products
driving force of international contract manufacturing
Economic development of a number of countries
depend on contract manufacturing like China, Korea,
Mexico, Thailand, Taiwan, Now Indonesia, Vietnam andIndia
E.g. Taiwan world leader in semi conductors, China
30% AC, 24% washing machines, 16% refrigerators sold
in the USA. Nike shoe entirely manufactures throughcontractual basis
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Example :
1. Chrysler has contract manufacturing arrangement with
Daimler-Punch an Austrian group to build its jeepCherokee model under contract of yearly volume of 47,000
Chrysler supplies stamped metal parts
2. French Shoe company in China and Indonesia
3. Nike entire production is on contract manufacturing.
Likewise Reebok, Adidas etc, Electronic industry in USA
and Europe
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Local Manufacturing
A common and widely practiced form ofentry is local production of companys
products.
Types:
Overseas Assembling
Joint Venture Wholly Owned Subsidiaries
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Reasons for Local Production
Local cost, market size, tariffs, laws and political
consideration may affect a choice to manufacture locally
Sometimes cost cutting rather than market entry
International firms establish plants in Taiwan, Malaysia,
Vietnam, China little intention to enter the market export to third country
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Wholly- owned subsidiary
Tata Tea entered into JV with Tetley group,
UK in 1994,acquired Tetley in 2000
Asian paints has 27 manufacturing plants in
24 countries
Aditya Birla Group has wholly owned
manufacturing base in south east Asia
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Establishing local operation to gain new business
An aggressive strategy a strong commitment in international
operation often the only way to convince clients to switchsuppliers
Important strategy in industrial market service and reliability
of supply main factors in the choice of suppliers
Establishing Foreign production to defend existing business
Changing economic or political factors necessitate such a move
E.g. Japanese car manufacturers, that had been subject to an
import limitations of assembled cars, from USA imported from
Japan, began to build factories in USA to protect their market.
In 1982 Honda became the first Japanese manufacturer to set up
production in USA
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Moving with established customer
In many industries, important suppliers keep a relationship by
establishing plants near customer locations when customers buildnew plants elsewhere, suppliers move too particularly among Car
manufacturers and part suppliers
Ownership Strategy Companys entering a foreign market have to decide on
more than the most suitable entry strategy WOS or JV
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Assembly
A firm locates a portion of the manufacturing process in
the foreign country
Assembling consist of the last stage of the manufacturing
and depends on a ready supply of components or
manufactured parts to be shipped from another country
Involves heavy use of labor rather than expensive
investment of capital outlets
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In order to save in shipping costs and high import tariffs
and counter non tariff barriers and take advantage of cheap
labour cos ex ports components in CKD condition and
assembles them overseas e.g Mahindra &Mahindra, hasentered Kenya by assembling operation
Tata motors assembling operations with Nita Company Ltd
in Bangladesh for commercial vehicles
Japanese automobile cos have entered European market by
assembling to overcome import barriers
Sometimes Cos may use some of the local resources
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Joint VentureUnder a joint venture arrangement a foreign company
invites an outside partner to share stock ownership in thenew unit minority or majority or 50:50share
Reasons for JV
By bringing in new partner , company share the risk for anew venture
JV partner may have important skills or contacts of value to
the firm
Local firm has good contacts with the government and
represents local business interests
Provide greater control over production and marketing
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Examples: During 1960-70 Japanese market was viewed as a
difficult environmentgovt regulationsJV
Mc Donalds entered Japan in 1971 through JV with Fujita&Co
Mc Donalds in India through JV
Wh ll d f i b idi i
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Wholly -owned foreign subsidiaries
In order to have complete control and ownership of
international operations, a firm opts for foreign direct
investment to own foreign operations.
Benefits
Develops a foreign market with growth potential by
way of product differentiation and competitiveresponse
Helps in overcoming import barriers-high tariffs,
quota
Gets benefits of incentives provided by host countries Helps a firm to spread risks over various markets
Take advantage of lower cost of production in host
countriesraw material. labour
Avoids conflicts with overseas partners
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Limitations:
Need substantial financial and other operational
resources Need substantial international ex posure before
establishing WOS.
Ways of establishing WOS
Acquisition
Greenfield operation
Acquisition
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Acquisition
A company can acquire a foreign company and all its
resources in a foreign market
Acquisition provides speedy access to the resources of a
foreign company such as skilled man power , the
companys product and brand and its distribution
channels Green field operation
The firm creates the production and marketing facilities
on its own from scratch
Green field operations preferred under following
situations
Smaller firms with limited resources
Have the option of selecting own location on the basis of
their own screening criteria Example page 47
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