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Entry into international markets


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Entry into international markets

  2. 2. International Market Entry Strategies Without any additional Investment Full pledged Investment in Production & Marketing Investments in Marketing arrangements , No investment in Production DIRECT EXPORTS INDIRECT EXPORTS LICENSING CONTRACT MANUFACTURING ASSEMBLY FRANCHISING JOINT VENTURE STRATEGIC ALLIANCE M & A Fig: Foreign Market Entry Modes
  3. 3. EXPORTING The company can export the product from home base, without any marketing or production or organization overseas. When cost of production and infrastructural problems are higher while volume of foreign market is low , export is preferred. EXPORTING INDIRECT EXPORTING DIRECT EXPORTING
  4. 4. Indirect exporting When the firm delegates the task of selling goods abroad to an outside agency , it is called INDIRECT EXPORTING. Intermediaries like merchant exporters, export houses etc present in domestic market assist in fetching foreign buyers
  5. 5. Indirect exporting - Why and Why not? WHY ?? -Domestic middleman expert in foreign market knowledge and local documentation process make exporting easy for a new or less experienced exporter -In case export houses/merchant work on commission basis, there is incentive for them expand sales WHY NOT ?? - Loss of control over the branding, name and reputation of the product and firm
  6. 6. Direct Exporting When the manufacturing firm itself performs the task of selling goods abroad rather than entrusting it to any outside agency it is called Direct Exporting. Home based export or international marketing or a sales subsidiary established in overseas market takes care of the export /sales activity
  7. 7. Direct exporting - Why and Why not? Why? -More control over the selling and marketing activities -higher margins due to less or non involvement of intermediaries Why Not ? - Requires greater degree of expertise and experience in foreign trade - Suitable of companies having large volume of exports
  8. 8. LICENSING Under Licensing , the local firm (Licensee) obtains license (written permission) from a foreign firm (Licensor) to use the latter’s patents, trademarks , copyrights , technology , know-how or marketing skills in consideration for a fee called royalty. A manufacturer chooses licensing when: 1. Capital is scarce 2. Import restrictions discourages direct entry 3. The country is sensitive to foreign ownership
  9. 9. Elements of Licensing License is a contract and must have these elements: i. Product and Territorial coverage ii. Length of contract , quality control iii. Grant back and cross- licensing iv. Royalty rate and structure v. Choice of currency vi. Choice of law
  10. 10. Licensing – Why and Why not? Why Licensing : - Very flexible and allows easy entry into foreign market without immediate investment - Lower risk for business takeovers or govt. interventions because the local person manages the business in the foreign country. Licensing Why not ? - Non-performance of the of the Licensee or the marketing of substandard quality of products by licensee will effect the business and image of licensor
  11. 11. FRANCHISING Franchising is a special form of Licensing in which a parent company (the franchisor) grants another independent company (the Franchisee) the right to do business in prescribed manner. The franchisor makes total marketing programme available to the franchisee. • Another common form of franchising is where the franchisor supplies an important ingredient for the finished product.
  12. 12. 3 Forms of Franchising • Manufacturer- Retailer systems (eg.- Automobile dealership) • Manufacturer – Wholesaler System (eg.-Soft drink company with its bottlers) • Service Firm – Retailer System ( eg. – Fast Food outlets)
  13. 13. CONTRACT MANUFACTURING Under contract manufacturing , a company arranges to have its products manufactured or assembled by an independent local company on a contractual basis as per specification while it retains the responsibility of marketing the product. Contract Manufacturing is also called OUTSOURCING
  14. 14. Contract Manufacturing - Why and Why not? Advantages of Contract Manufacturing : - No commitment of resources for setting up production facilities abroad - Production cost may be reduced due to lower cost of production Disadvantages of Contract Manufacturing : - The local party gains experience in marketing , and in course of time may pose a threat to the parent company(potential competitor) - Less control over manufacturing and profit on manufacturing.
  15. 15. ASSEMBLY Under assembly strategy ,most of the components or ingredients are produced domestically and the finished product is assembled in the foreign country. Assembly usually involves heavy use of labour rather than extensive investment in capital outlays or equipment.
  16. 16. ASSEMBLY- Why ? Assembly is advisable when : There are economies of scale in the manufacture of parts and components Assembly operations are labour intensive and labour is cheap in foreign country. Gives the company cost advantage and helps in employment generation in local country.
  17. 17. JOINT VENTURE If the company which wants to enter foreign market sets up an enterprise in collaboration with a local firm in the host country. The two firms share the ownership and control of joint venture . Generally , the multinational provides the capital and technology whereas day-to-day management is taken care by local firm.
  18. 18. JOINT VENTURE Ways to create JVs: a) The firm may buy equity in a local company b) The local firm may acquire equity in an existing foreign firm c) The foreign firm and the local firm may jointly form a new company.
  19. 19. Joint Venture - Why and Why not? Advantages of JV - Potentially greater returns from equity participation as opposed to royalties - Greater control over production and marketing - Risk diversification and sharing with local partners Disadvantages of JV - Potential risk of breach of trust between partners - Both the companies should have something definite to offer.
  20. 20. STRATEGIC ALLIANCES In strategic alliances the two partners contribute a fixed amount of resources and venture develops on its own . In an alliance, two firms pool their resources directly in a collaboration that goes beyond the limits of JVs. Forms of strategic alliances: Technology – based alliances Production – based alliances Distribution – based alliances
  21. 21. Strategic Alliances - benefits • Strategic alliances enable companies to increase productivity and profitability by avoiding unnecessary fragmentation of resources and duplication of investment and effort. • The company reduces competitive advantage by forming strategic alliances with existing or potential competitors
  22. 22. MERGER & ACQUISITION M&A is not only entry but also expansion strategy. In merger, international business firm absorbs one or more enterprises abroad by purchasing assets and taking over liabilities of those enterprises on payment of an agreed amount. In Acquisition, the international business firm may also take over the management of an existing company abroad by taking the controlling stake in the equity of that company at a predetermined price.
  23. 23. MERGER & ACQUISITION • M&A provides easy access to new technology or a patent right • M&A helps in reducing the competition • But, deficiencies in evaluation of the companies during acquisition may lead to losses for acquiring firm
  24. 24. ENTRY STRATEGY ANALYSIS Each entry strategy has to be analysed on these following parameters: 1. Expected Sales (company market share and total potential size of the market in that market) 2. Costs (manufacturing and administrative cost ) 3. Extent of investment in assets (investments made in conjunction with entry/exit into the new market) 4. Profitability (depending on assets deployed, expected sales and cost incurred) 5. Risk factors (credit and non credit risks)
  26. 26. FACTORS AFFECTING ENTRY DECISIONS Firm Factors • International Experience • Core Competencies • National culture of home country • Corporate culture • Firm strategy, goals and motivation
  27. 27. FACTORS AFFECTING ENTRY DECISIONS Industry Factors • Industry Globalization • Industry Growth rate • Technical intensity of industry
  28. 28. FACTORS AFFECTING ENTRY DECISIONS Location Factors  Extent of scale / location economics  Country risk  Cultural distance  Knowledge of local market  Potential of local market
  29. 29. FACTORS AFFECTING ENTRY DECISIONS Venture – specific Factors  Value of firm assets risked in foreign location  Extent to which know-how involved in the venture is informal  Costs of making/ enforcing contracts with local partners  Size of planned foreign venture  Intent to conduct research and development with local partners
  30. 30. Thank you !!! For any query , suggestion or feedback mail at vijyata.rwc@gmail.com or comment in the comment box