Global Market Entry Strategies: Licensing,

Investment, and Strategic Alliances

Power PointFor

GBO

Case 1A car-making company from country A wants to commence selling its cars in country B. Owing to much higher production costs in country A and substantial cost escalation (the costs of overseas freight, insurance and custom duties), country B retail prices in the export option would be around US$20,000, while the alternative of manufacturing these in country B produce retail prices in the vicinity of US$15,000. Apart from the extra costs involved, country B applies quotas to car imports, setting these recently at 50,000 cars per year. At $20,000, there would probably some 8,000 of these exported to country B and sold there within the next 12 months, and then 12,000 sold in the second year and then, from the third year the sales would have levelled off at some 15,000 for the next two-to-three years. On the other hand, an FDI option would have cost the car-making company some $70,000,000 and would have seen first cars leaving the new production line in 24 months only. Achievement of full production and marketing capacity would have then taken an extra 18 months. The demand for these cars at $15,000 is estimated at min. 25,000 for year 3 through 7. Which of the two entry options should the car maker take? What would this choice depend on?

IntroductionTrade barriers are falling around the world

Increasing dependence of companies on international business for survival and growth.

A growing intensity of competition would call

for an improved quality of the overseas market and entry mode selection

Companies need to have a strategy to enter world markets

Selection of overseas markets and entry modes lies at the very heart of any international strategy

Modeling approaches

The literature of the subject makes distinction between three broad groupings of foreign market entry modes:

export,

contractual and

investment-based

Modeling approaches….contd…

Most classifications of market entry modes (e.g. Cateora, 1996; Keegan, 1995;

Onkvisit and Shaw, 1993) contain only

generic categories, such as direct or indirect

exporting, franchising, licensing, joint

venturing, partially or wholly owned

overseas subsidiary, management

contracting and contract manufacturing.

Modeling approaches….contd…

• Market entry mode selection is a particular

case of the wider decision process category

often referred to in the literature as market

servicing decisions

Modeling approaches….contd…

According to Root (1994), three basic approaches to entry mode selection are possible:

Root, F.R. (1994), Entry Strategies for International Markets, Lexington Books, San Francisco, CA.

Root’s classification

1 selection in absence of any market entry strategy, or ``the sales approach'‘ characterized by, among others, short

time horizons, no systematic selection criteria, few product adaptations and no effort to control overseas distribution;

2 selection in accordance with an existing market entry strategy (i.e. naõÈve or pragmatic rules (Root, 1994, pp. 159-60)); and

3 selection which considers some strategy rule(s) and involves systematic comparisons of alternative modes available (systematic approach

Various Models to market selection

These models view market selection process as composed of three stages: screening, identification (or in-depth screening), and (final) selection.

Screening

During screening, macro-level indicators should be used to eliminate countries that do not meet the objectives of the firms (Kumar et al., 1994). Johansson (1997) proposes that market size, growth rate, basic fit between customer preferences and the existing product line, and competitive rivalry be used as criteria at this stage. Root (1994) notes that country screening may be conducted either in top-down or bottom-up fashion.

Identification stage

Involves eliciting industry-specific information (market factors, competition analysis) on which to

base a short-list of potential country segments. Assessment of industry attractiveness for each of the short-listed countries considers objectives and resources constraints and expansion strategies. Market size and growth, level of competition, entry barriers and market segments are investigated at this stage.

Selection stage

selection involves studying firm specific information, such as profitability, product compatibility with the existing portfolio, to select the markets to enter. The methodology of identifying potential foreign markets proposed there considers three types of limitations:

• 1 company objectives;• 2 strategies; and• 3 resources.

Categories of factors that influence this selection comprise (Sarkar and Cavusgil, 1996):

product-market factors;

firm/foreign venture specific factors;

host-market factors; and

home-market factors.

More specifically the above includes:

cultural factors;

global industry structure;

global corporate objectives;

relational dimensions of interfirm collaborations;

firm's bargaining power with respect to foreign governments; and

political leverage of the home country government.

To demonstrate that an overseas market should be chosen over any of its alternatives requires a systematic examination of the feasibility and commercial viability of various modes of entry into alternative markets (Figure on next slide).

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1. Selecting the Target Market

Introduction

Licensing

A contractual agreement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation– Patent

– Trade secret

– Brand name

– Product formulations

Advantages to Licensing

Provides additional profitability with little initial investment

Provides method of circumventing tariffs, quotas, and other export barriers

Attractive ROI

Low costs to implement

Disadvantages to Licensing

Limited participation

Returns may be lost

Lack of control

Licensee may become competitor

Licensee may exploit company resources

Special Licensing Arrangements

Contract manufacturing– Company provides technical specifications to a subcontractor or

local manufacturer

– Allows company to specialize in product design while contractors accept responsibility for manufacturing facilities

Franchising– Contract between a parent company-franchisor and a franchisee

that allows the franchisee to operate a business developed by the franchisor in return for a fee and adherence to franchise-wide policies

Franchising Questions

Will local consumers buy your product? How tough is the local competition? Does the government respect trademark and franchiser rights? Can your profits be easily repatriated? Can you buy all the supplies you need locally? Is commercial space available and are rents affordable? Are your local partners financially sound and do they understand the basics of franchising?

Investment

Partial or full ownership of operations outside of home country

– Foreign Direct Investment

Forms– Joint ventures– Minority or majority equity stakes– Outright acquisition

Joint Ventures

Entry strategy for a single target country in which the partners share ownership of a

newly-created business entity

Joint Ventures

Advantages– Allows for sharing of risk

(both financial and political)

– Provides opportunity to learn new environment

– Provides opportunity to achieve synergy by combining strengths of partners

– May be the only way to enter market given barriers to entry

Disadvantages– Requires more investment

than a licensing agreement

– Must share rewards as well as risks

– Requires strong coordination

– Potential for conflict among partners

– Partner may become a competitor

Investment via Ownership or Equity Stake

Start-up of new operations– Greenfield operations or – Greenfield investment

Merger with an existing enterprise

Acquisition of an existing enterprise

Global Strategic Partnerships

Possible terms:– Collaborative agreements– Strategic alliances– Strategic international alliances– Global strategic partnerships

The Nature of Global Strategic Partnerships

The Nature of Global Strategic Partnerships

Participants remain independent following formation of the allianceParticipants share benefits of alliance as well as control over performance of assigned tasksParticipants make ongoing contributions in technology, products, and other key strategic areas

5 Attributes of True Global Strategic Partnerships

Two or more companies develop a joint long-term strategyRelationship is reciprocalPartners’ vision and efforts are globalRelationship is organized along horizontal lines (not vertical)When competing in markets not covered by alliance, participants retain national and ideological identities

Success Factors

Mission. Successful GSPs create win-win situations, where participants pursue objectives on the basis of mutual need or advantage.Strategy. A company may establish separate GSPs with different partners; strategy must be thought out up front to avoid conflicts.Governance. Discussion and consensus must be the norms. Partners must be viewed as equals.

Success Factors

Culture. Personal chemistry is important, as is the successful development of a shared set of values. Organization. Innovative structures and designs may be needed to offset the complexity of multi-country management.Management. Potentially divisive issues must be identified in advance and clear, unitary lines of authority established that will result in commitment by all partners.

Alliances with Asian Competitors

Four common problem areas– Each partner had a different dream– Each must contribute to the alliance and each

must depend on the other to a degree that justifies the alliance

– Differences in management philosophy, expectations and approaches

– No corporate memory

Cooperative Strategies in Japan: Keiretsu

Inter-business alliance or enterprise groups in which business families join together to fight for market share

Often cemented by bank ownership of large blocks of stock and by cross-ownership of stock between a company and its buyers and non-financial suppliers

Keiretsu executives can legally sit on each other’s boards, share information, and coordinate prices

Cooperative Strategies in South Korea: Chaebol

Composed of dozens of companies, centered around a bank or holding company, and dominated by a founding family– Samsung– LG– Hyundai– Daewoo

21st Century Cooperative Strategies: Targeting the Digital Future

Alliances between companies in several industries that are undergoing transformation and convergence– Computers– Communications– Consumer electronics– Entertainment

Beyond Strategic Alliances

Next stage of evolution of the strategic alliance

– Super-alliance

– Virtual corporation

Market Expansion Strategies

Companies must decide to expand by:– Seeking new markets in existing countries

– Seeking new country markets for already identified and served market segments

Looking Ahead

Chapter 10 The Global Marketing Mix – Product and Brand Decisions