imm unit-04 (global market entry & export marketing)

07/06/10 1

By :

Prof. Amit Kumar

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International marketing has become a major concern for business schools to develop global strategies to lead and sustain in the much expanded and

competitive arena. Liberalization thus catalyzing market competition, poses challenge for the

managers in handling the rigors of expanding global marketplace.

Syllabus aims at providing contemporary knowledge & skills on issues of global

marketing management.

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Importance of this course

Global Marketing Management

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Course: Global Marketing Management

1. Framework of Global Marketing Management

2. Global Marketing Research

3. Decision Making in International Marketing

4. Foreign Market Entry & Export Marketing

5. Product Planning & Development

6. Global Pricing Strategies

7. Global Distribution System

8. Promoting Product Internationally

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Global Marketing Management

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Global Marketing Management Global Market Entry & Export Marketing

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Contents

• Concept of International Market Entry• Factors Affecting the Selection of Entry Mode• Entry Modes for ICICI Bank & Dr Reddy’s Laboratory• Modes of International Market Entry

On the Basis of Production in Home Country On the Basis of Production in Foreign Country

• Advantages & Disadvantages of Each Mode of Entry

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Concept of International Market Entry

In order to succeed in international markets, the decision to select an appropriate entry mode is a crucial and integral part of a firm’s international

marketing strategy.

The mode of entry into international markets varies from low-commitment indirect exports to high-commitment

direct investment (wholly owned subsidiaries) in foreign markets.

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Factors Affecting the Selection Of Entry Mode

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External Factor Internal Factor

8


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Market Growth

Market Size

Govt. Regulation

Level of Competition

Level of Risk

Production & Shipping Costs

Physical Infrastructure

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Availability of Company Resource

Company Objectives

Level of Commitment

International Experience

Flexibility

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Market Growth

Market Size

Govt. Regulation


Level of Risk



Company Objectives

Level of Commitment


Flexibility


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External Factor

Market Size

• One of the key factor, has to keep in mind while selecting an entry mode

• Countries with large market size justify the modes of entry with long-commitment requiring higher level of investment, such as WOS.

To take the advantage of market size, Indian company Ranbaxy entered in Chinese market in 1990,

entered into a JV in 1994 and emerged as a market leader with brand Cifran.

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External Factor

Market Growth

• Most of the large, established markets have reached to a point of saturation for consumer goods.

• The overall growth in most of the US and EU markets is about 7%, while in emerging markets it is over 30%.

Therefore, from the perspective of long-term growth, firms invest more resources in markets with high growth potential such as China, India, Thailand,

Indonesia, Malaysia, Philippines etc.

http://www.imf.org/external/pubs/ft/weo/2009/update/01/

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

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External Factor

Govt. Regulation

• UAE is a lucrative market for Indian firms but most firms operate there with a local partner.

• Trade barriers such as ecological regulations and local content requirements also affect the mode of entry. It has been a major reason for increased foreign investment in Mexico, which is a part of NAFTA, in order to cater to the US market.

It is due to high import tariff on automobiles that foreign firms were forced to set up plants in

China.

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External Factor


• This is one of the major reasons behind auto companies setting up their operations in India and other emerging markets so as to effectively respond to the global competition.

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External Factor


• Such as roads, railways, telecommunications, financial institutions and marketing channels are the pre-condition for a company to commit more resources to an overseas market.

• The level of infrastructure development has been responsible for major investments in Singapore, Dubai and Hong Kong.

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External Factor

Level of Risk

• Firms have greater inclination to invest resources in countries with stable governments & transparent legal systems.

• Economic risk may arise due to volatility of exchange rate, upheavals in BOP that may affect the cost of other inputs for production, and high inflation rate

• If the marketing system in foreign country is similar to that of firm’s home country, the firm has better understanding of operational problems.

Political Risk

Operational Risk

Economic Risk

http://www.rbi.org.in/scripts/sdds_viewdetails.aspx?id=5

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External Factor


• Markets with substantial cost of shipping as in the case of low-value high-volume goods may increase the logistics cost.

• The increased shipping cost may not only be due to the longer distance but also because of the lack of availability of competitive shipping lines as in case of shipping goods from India to most of the African and Latin American countries.

• Many firms establish their manufacturing bases in developing countries, in order to take the advantage of lower production costs.

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Internal Factor

Company Objectives

• Companies operating in domestic markets with limited aspirations generally enter foreign markets as a result of a reactive approach. In such cases, companies receive orders from acquaintances, firms and relatives based abroad, and they attempt to fulfill these export orders.

• However, the strategic objectives of proactive companies make them enter into international markets through investment modes of entry.

Reactive Proactive

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Internal Factor


• Choices of an entry mode depends upon the financial strength of the firm.

• It may be observed that Indian firms with good financial strength have entered international markets by way of wholly owned subsidiaries or equity participation.

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Internal Factor

Level of Commitment

• In view of the market potential, the willingness of the company to commit resources in a particular market also determines the entry mode choice.

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Internal Factor


• Well exposed to the dynamics of the international marketing environment.

• It may be observed that only those Indian companies, such as Ranbaxy, Tata Tea, Asian paints etc. which have substantial experience in foreign markets have opted for equity participation or wholly owned subsidiaries in international markets.

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Internal Factor

Flexibility

• Companies should also keep in mind exit barriers when entering international markets.

• The markets which are difficult to forecast may necessitate an exit strategy over a period of time and therefore may need to be approached by the way such as licensing and franchising, where the companies’ stake are low and the exit is easy.

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Choosing the Right International Market Entry Mode

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Entry Mode Pros Cons

Export

- Indirect

- Direct

Piggybacking Exporting

Providing Offshore Services

International Franchising

International Licensing

Strategic Alliances

Contract Manufacturing

Wholly Owned Subsidiaries

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International Market Entry Mix

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Country Market

WOS JV Franchising Licensing Exporting

Country-1

Country-2

Country-3

Country-4

Country-5

Country-6

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Entry Modes: Case of ICICI Bank

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In order to reach out to Indians living abroad, ICICI Bank entered the international market in 2003 using a mix

of entry modes.

It has established subsidiaries in London and Toronto with an investment of US$ 50 million and US$ 20 million respectively. It opened offshore branches in Singapore and Bahrain. Representative offices

in Dubai, Shanghai and Hong Kong.

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Entry Modes: Case of ICICI Bank

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These different modes of entry have been adopted by ICICI Bank because of differing governmental regulations, as a number of countries require

banks to first run either representative offices or offshore branches for a few years before a

subsidiary is allowed.

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Entry Modes: Case of Dr Reddy Lab

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Dr Reddy’s Laboratory has gone for wholly owned subsidiaries in the US, France, Singapore and the

Netherlands, Hong Kong because of the large market size, potential for growth and lower risk

factors.China offer huge market potential, but because of the

level of difficulty involved in responding to local environment conditions and risks, the company has

entered into JV with local partners.Market with relatively low potential such as Ukraine,

Romania, Vietnam and Sri Lanka are being served by resident offices.

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Routes of Globalization The usual routes of globalizations are exports and imports, use of assets, performance of services……..

Presence in Foreign Markets

Fo

reign

In

vestmen

t

High

High

Low

Low

Exports & Imports

Tourism &Transportation

Use of Assets

Performance of

Services

Direct Investment

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International Market Entry Modes

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Production in Home Country

Production in Foreign Country

Export Offshore Services

Indirect

Direct

Piggybacking Export

ContractualMode

Investment Mode

Overseas AssemblyOr Mixing

JV WOS

L F TurnkeyProjects

Mgt.Contracts

GSA ContractManufacturing

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Production in Home CountryExport: Indirect

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When a firm does not have much exposure to foreign markets, and has limited resources to invest in

export development, indirect exporting is a recommended strategy for entering.

Indirect export can be defined as the process of selling products to an export intermediary in the

company’s home market who would in turn sell the products in overseas markets.

Indirect exports may occur by the way of: 1. Selling to foreign firm or buying agent in India2. Exporting through a merchant intermediary

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Some of the functions carried out by trading houses are:1. Market selection and market research2. Customer identification and evaluation3. Commercial and technical negotiations4. Vendor development5. Import items required by export production6. Counter trading7. Ensure timely payments8. Export documentation and shipping9. Manages crisis and disasters10. Create distribution networks abroad11. Foster special relationship with the government


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Classification of various trading houses under EXIM policy,

Category

Avg. FOB value of export made during preceding

3 years

FOB value of export made

during preceding licensing

years

Avg. net forex value of export made during preceding

3 years

Net forex value of export made

during preceding

licensing years

Export House 15 22 12 18

Trading House 75 112 62 90

Star Trading House

375 560 312 450

Super Star Trading House

1125 1680 937 1350

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Major trading houses in India include:1. Tata International2. Adani Exports3. Reliance India Ltd.4. Metals & Minerals Trading Corporation (MMTC)5. State Trading Corporation (STC)6. Ruchi International7. Surya Global

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Production in Home CountryExport: Direct

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In direct exports a firm’s products are sold directly to importers in overseas markets.

Direct export does not mean selling products directly to end-users. Direct exports are accomplished through foreign-based independent market intermediaries

such as agents and distributors.

Direct exporting is far more complex than indirect exporting.

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Agents represents the exporting company in a given market and finds wholesaler and retailers for its

products. Agents may be exclusive, semi-exclusive and non-exclusive.

Overseas distributors is a foreign-based merchant who buys the products on his own account and resells them to wholesalers and retailers to make profit.

Distributors are generally sole importers of the firm’s product in the market.

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The disadvantages of direct exporting include higher commitment of resources as considerable

investment is needed for marketing, logistics and administrative cost and higher risk exposure.

A transition from indirect to direct exporting has to be well planned and gradual.

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Production in Home CountryExport: Piggybacking or Complementary Export

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In piggybacking exports, overseas distribution channels of another firm are used by the company to make its

product available in the overseas market.

Exporting company know as ‘Rider’, uses a foreign company which has an established distribution network in foreign market, known as ‘Carrier’.

Normally, the piggybacking arrangement is made for products from unrelated companies that are complementary (allied) but non-competitive.

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Production in Home CountryExport: Piggybacking or Complementary Export

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An Indian confectionery firm Parry’s distribution network was used in a piggybacking arrangement by

Wrigley’s a US based chewing-gum company- to enter the Indian market. It provides immediate

access to over 250,000 retail outlets.

Tanishq sells its jewellery in India exclusively through company-controlled retail outlets whereas it has tied up with Highglow, a

jewellery retail chain in the US, to utilize the latter’s distribution channels.

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Production in Home CountryExport-Import Trade Statistics

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Production in Home CountryProviding Offshore Services

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A company based in India can provide offshore services to overseas clients with the help of information and

telecommunication technology. India enjoys a distinct cost advantage in this regard.

The cost benefit of shifting a routine work from US to India may result in saving of up to 30-40%, as a skilled worker in India earns around US$ 6-8 an

hour as opposed to US$ 12 in the US.

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Business sectors which provide opportunities foroffshore services include:

1. Insurance: Claim processing, call centers2. Banking & Finance: Loan processing, call centers3. Airlines: Revenue accounting, call centers4. Telecom: Billing, Customer relations, call centers5. Automotive: Engineering & design, accounts6. Other sectors: Transportation, etc

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Production in Home CountryInternational Global Sourcing Powers

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LeaderUp &

Comers

Challengers Beginners

BelarusBrazilCaribbeanEgyptEstonia

UkraineVenezuelaSingaporeNew ZealandLithuania

GhanaCubaKoreaMalaysiaMauritiusSri Lanka

VietnamThailandNepalTaiwan

CanadaChinaHungary

MexicoPhilippinesPolandRussiaSouth Africa

INDIA

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As per Nasscom- Mckinsey estimates, out of the estimated global BPO of US$ 250 billion by 2006, India has the potential to provide offshore services

of about US$ 21-24 billion by 2008 with employment potential of about 11 lakh persons.

Gartner places India as the leading global sourcing power.

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Production in Foreign CountryContractual Mode: Licensing

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• Under a License Agreement, one firm permits another to use its intellectual property for compensation called royalty, as it happened between Arrow Company and Arvind Clothing Ltd.

• The firm that makes the offer is the licensor and the recipient firm is act as the licensee.

• The property licensed generally includes such assets as patent, trademarks, copyrights, trade-secrets, technical know-how, business skills.

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Life Cycle of Benefits of Licensing

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Few disadvantages of licensing are:

• Possible loss of quality control• Risk of technology being stolen• Licensing fees are likely to be lower than FDI

profits.• Possible loss of opportunity to enter the

licensee’s market with FDI later.

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Production in Foreign CountryContractual Mode: Franchising

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• Franchising which involves the granting of right by a parent company (franchiser) to another (franchisee) to do business in a prescribed manner.

• This right can take the form of selling the franchiser’s products, using its name, production and marketing techniques or using its general business approach.

• Franchising is adaptable to the international arena, it can result in a highly profitable business. In fast foods- McDonald’s, In Hotel business-Le Meridian, and others like Midas, GE and Coca-Cola.

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Production in Foreign CountryContractual Mode: Franchising

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• Franchising agreement typically involves the payment of a fee upfront and then a percentage on sales. In return, the franchiser provides assistance, and in some instances, may require the purchase of goods or supplies to ensure the same quality of goods and services worldwide.

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Production in Foreign CountryContractual Mode: Turnkey Projects

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• International businesses earn money in the form of fees for service rendered. This is true in banking, insurance, rentals, engineering, management services.

• Turnkey Operations are typical modes for earning such fees. Here, the company contracts with a foreign entity to design and build an entire operations. On completion, the operation is handed over to the owner who can use the facilities straightway.

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Production in Foreign CountryContractual Mode: Turnkey Projects

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• The Italian company, Fiat, for example constructed a complete automobile plant in the Russia under this type of agreement.

• Tata Consulting engineers, India, are specialists in executing turnkey projects. like, 3*60 MW hydro-electric project in Iran,180 room hotel project in Yemen etc.

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Production in Foreign CountryContractual Mode: Management Contracts

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• Companies also earn fees through management contracts - arrangements in which one firm contracts with a foreign corporation or government to manage an entire project or undertaking for a specific period.

• Most management contracts provide for training of local personnel who will eventually take over the management responsibilities.

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Production in Foreign CountryContractual Mode: Management Contracts

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• An example, Disney receives management fees from managing theme parks in France & Japan.

• For a ten-year period(1969-79), Citibank had lent its managerial expertise to Grindlays Bank.

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Production in Foreign CountryContractual Mode: Global Strategic Alliance

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GSA refers to the relationship between two or more firms that cooperate with each other to achieve

common strategic goals but not form a separate company.

Parent Company X

Parent Company Y

Company Z(Joint Venture)

Company X Company YContractual

Agreement

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Production in Foreign CountryContractual Mode: Global Strategic Alliance

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Tata Motors has launched its range of Indica cars in the UK under the brand name City Rover using the

marketing channels of the MG Rover Group. The company has also forged a strategic alliance with Honda Motor Co. Ltd, Japan, to manufacture its

‘Accord’ model of car in India.In order to develop the medicine market in Poland,

Ranbaxy has forged SA for marketing its products with Glaxo SmithKline.

Nestle has SA with Coca-Cola to market its ready to drink coffee and tea under the brand name

Nescafe and Nestea.

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Production in Foreign CountryContractual Mode: Contract Manufacturing

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Under CM, the manufacturing operations of an international firm are carried out at offshore

locations on a contractual basis.

The international firm takes care of marketing in international markets whereas the contracted manufacturer limits

itself to production activities.

A number of global companies outsource their manufacturing activities to

low-cost locations.

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CM has also been used as a strategic tool for economic development in a number of countries such as

Korea, Mexico, Thailand, China etc.

• Taiwan is a world leader in semi-conductor manufacturing.

• China produces 30% of air conditioners, 24% of washing machines and 16% of refrigerators sold in the US.

• Nike, the leading international shoe brand gets its manufacturing done through CM throughout the world.

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Indian pharmaceutical companies find CM a significant means of maintaining a high-growth rate in view of

limited resources for R&D.

• Ranbaxy and Lupin Laboratories were among the first Indian companies to get manufacturing contracts from MNCs like, Eli Lilly and Cynamid.

• Subsequently, Wockhardt India, Cadila Health Care, Sun Pharma and Dr Reddy’s Lab Ltd have also entered into contract manufacturing with several overseas firms.

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Production in Foreign CountryInvestment Mode: Overseas Assembly or Mixing

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In order to avoid the high cost of shipping and high import tariffs, counter non-tariff barriers for

import, and to take advantage of cheap labor in overseas markets, a company exports various

components of the product in completely knocked down (CKD) condition and assembles

them overseas.

In case of machines and food products, the equivalent of assembling is mixing the ingredients while

importing from the home country.

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Production in Foreign CountryInvestment Mode: Overseas Assembly or Mixing

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Most of the Japanese automobile companies entered the European market by establishing their

assembling operations in Europe to overcome import barriers.

Tata Motors has forged a strategic alliance with Nita Company Ltd, Bangladesh, for assembly and sale of its commercial vehicles in Bangladesh.

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Production in Foreign CountryInvestment Mode: Joint Venture

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• A direct investment is one that allows the investor a controlling interest in a foreign company. FDI is another name for direct investment. FDI may take the form of a joint venture or a wholly owned subsidiary.

• Joint Venture is a shared ownership in a foreign business. Generally, the venture is 50-50 ownership in which there are two parties, each of which holds a 50 % ownership stake and contributes a team of managers to share operating control.

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• Fuji-Xerox is one of the most enduring and successful joint ventures between two companies of different countries.

• There are 868 Indian joint ventures abroad, out of which 286 are in operations. Joint venture works well if an international business finds a right local partner.

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• A local partner can provide competent management to the venture.

• If the host country requires local participation in the equity, wholly owned subsidiary will not help.

• The local partner understand the culture of the local market. An international business takes years to acquire such knowledge if it enters a foreign market through wholly owned subsidiary.

• Sometimes, another name for joint venture is being used as strategic alliances.

Advantages:

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Disadvantages:

• A foreign firm’s apprehension about a local partner’s interference in managerial decisions and actions.

• Likely increase in political risk, if a wrong partner is selected.

• Transfer pricing on products or components bought from or sold to related companies triggers conflict.

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Production in Foreign CountryInvestment Mode: Wholly Owned Subsidiaries

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• A wholly owned subsidiary can be set up in a foreign market in either of two ways: the company can set up a totally new operation or can acquire an established firm and use the firm to promote its product.

• The subsidiary that is established starting from the ground up is called Greenfield investment.

• Compared to Greenfield investment, a cross-border Acquisition has a number of benefits. First, acquisition is quicker than establishing a firm. Second, it takes less time to gain a presence.

• In a wholly owned subsidiary, the company owns

100 % of the equity.

imm unit-04 (global market entry & export marketing)

Documents

global marketing research

global strategies

global marketplace

entry mode countries

appropriate entry mode

global pricing strategies

global distribution

catalyzing market competition