Global Market Entry Strategies Ban Galore)

8/8/2019 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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Global Market Entry Strategies Ban Galore)

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