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Modes of entry

  1. 1. Modes Of Entry (International Markets)
  2. 2. There are six major modes of entering an international market. In this presentation, we will take up each mode and discuss their advantages and disadvantages.
  3. 3. Exporting Definition: It is the process of selling of goods and services produced in one country to other countries. Advantages of exporting Exporting has two distinct advantages. First, it avoids the often substantial cost of establishing manufacturing operations in the host country. Disadvantages of exporting high transport cost can make exporting uneconomical, particularly for bulk products
  4. 4. Indirect exporting In indirect export modes the manufacturer uses independent export intermediaries located in its own country, so the manufacturer doesn’t have a direct contact with international customers or partners. Indirect exporting means selling to an intermediary, who in turn sells your products either directly to customers or to importing wholesalers.
  5. 5. Direct exporting While implementing direct exporting, exporters take on the duties of intermediaries and make direct contact with customers in the foreign market. Direct exporting can be performed in several ways: ¨ a foreign agent acting on behalf of the exporter and its name, ¨ a foreign distributor acting on its own account and on its own behalf,
  6. 6. Cooperative exporting Cooperative exporting is recommended entry mode especially for small and medium-sized firms, due to their resource constraints (mainly financial and human). They are two basic modes of cooperative exporting, namely Export grouping Piggybacking. Piggybacking is the entry mode where the contract parties are two entities, known as a rider and a carrier. The first one is usually a small entrepreneur, and the other one is of large size.
  7. 7. Licensing Definition: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment . The permissions licensed may include: ¤Patents ¤Trademarks ¤Copyrights ¤Technology ¤Technical know-how ¤Specific business skills
  8. 8. License Agreement ● Licensor leases the rights to use intellectual property ● Licensee uses the intellectual property to create products ● Licensee pays a royalty to licensor ● Finally, licensee earns new revenues with low investment
  9. 9. Advantages The advantages of a licensing arrangement include: ● Quick, easy entry into foreign markets, allowing a company to “jump” border and tariff barriers ● Lower capital requirements ● Potential for large return on investment (ROI), which can be realised fairly quickly ● Low risk, since you enter with an established product and you take fewer financial and legal risks. Disadvantages The disadvantages of licensing arrangement include: ● You will have only a low level of control. ● Your licensee may become a competitor. ● You may lose intellectual property. ● Poor quality management can damage your brand’s reputation in other licence territories.
  10. 10. For example, about 90 percent of the $160 million a year in sales at Calvin Klein Inc. comes from licensing the designer's name to makers of underwear, jeans, perfume etc. The only merchandise the New York-based company makes itself, in fact, are its women's apparel lines.
  11. 11. Franchising •Under franchising, an independent organization called the franchisee operates the business under the name of another company called the franchisor. •In such an arrangement the franchisee pays a fee to the franchisor. •Franchising is a form of Licensing but the Franchisor can exercise more control over the Franchisee as compared to that in Licensing.
  12. 12. Franchising Agreements •Franchisee has to pay a fixed amount and royalty based on sales. •Franchisee should agree to adhere to follow the franchisor’s requirements. •Franchisor helps the franchisee in establishing the manufacturing facilities. •Eg.McDonalds,KFC
  13. 13. Advantages: •Low financial risks •Avoid tariffs, restrictions on foreign investment •Maintain more control than with licensing •Franchisee provides Knowledge of local market Disadvantages: •Limited market opportunities/profits •Depends on franchise •Possibility of creating future competitor
  14. 14. Mergers & Acquisitions In Mergers & Acquisitions, a home company may merge itself with a foreign company to enter an international business. Alternatively, the home company may buy a foreign company and acquire the foreign company’s ownership and control.
  15. 15. Reasons Behind Mergers and Acquisitions ● Economies of Scale ● Guaranteed Sources and Markets ● Acquiring Assets Cheaply ● Tax Losses ● Ego and Empire
  16. 16. Advantages ● Immediate ownership and control over the acquired firm’s assets ● Probability of earning more revenues ● The host country may benefit by escaping optimum capacity level or overcapacity level
  17. 17. Disadvantages ● Complex process and requires experts from both countries; No addition of capacity to the industry ; ● Government restrictions on acquisition of local companies may disrupt business ● Transfer of problems of the host country’s to the acquired company.
  18. 18. Strategic Alliance ➢ A strategic alliance (strategic partnership) is where two or more organization share resources and activities to pursue a common goal. ➢ There is no takeover or acquisition. ➢ Organisations enter into alliance for mutual benefit. ➢ Example include Starbucks
  19. 19. Joint Venture Common objectives in a joint venture : Market entry, risk/reward sharing, technology sharing and joint product development, and conforming to the government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favourable when: •The partners' strategic goals converge while their competitive goals diverge. •The partners' size, market power, and resources are small compared to the Industry leaders. •Partners are able to learn from one another while limiting access to their own proprietary skills.
  20. 20. Problems occuring during joint venture: •Conflict over asymmetric new investments •Mistrust over proprietary knowledge •Performance ambiguity - how to split the pie •Lack of parent firm support •Cultural clashes •If, how, and when to terminate the relationship.
  21. 21. Joint Venture of Maruti and SUZUKI: Maruti Suzuki is India's number one leading automobile manufacturer providing cars in various segments. Suzuki motors initially acquired 26% of equity in the company sharing all the resources with Maruti Udyog. Success of this joint venture made Suzuki to increase its equity form 26 % to 50%. Maruti has a market share of 53.3% in the Indian automobile market (Maruti Suzuki, 2010) which is much higher as compared to competitors like Tata, Mahindra, Hyundai and general motors. Maruti Suzuki has reported increase in profit since 2000; also the sales have been increasing tremendously (Maruti Suzuki, 2010). There has been continuous increase in turnover and it has reached a mark of Rupees 32,174.10 crores.
  22. 22. Joint Venture of Maruti and SUZUKI: •As per the survey Maruti Suzuki ranks highest in customer service along with dealer service in India for 11 consecutive years. Hence Maruti Suzuki was able to increase customer satisfaction and it retained its customers and was able to capture most of the Indian automobile market . The main reason for Maruti Suzuki's growth was the innovative products and services that suited the large and diverse demography.

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