Foreign Market EntryForeign Market Entry

Why enter foreign markets?Why enter foreign markets? Increase market shareIncrease market share:Domestic market may lack the :Domestic market may lack the

size to support efficient scale manufacturing facilities. size to support efficient scale manufacturing facilities. Example: AExample: Automobile manufacturersutomobile manufacturers

Mature or saturated home markets:Mature or saturated home markets:

Preferential trading agreements: India-PakistanPreferential trading agreements: India-Pakistan

Weak patent protectionWeak patent protection in some countries implies that in some countries implies that firms should expand overseas rapidly in order to preempt firms should expand overseas rapidly in order to preempt imitatorsimitators

Why enter foreign marketsWhy enter foreign markets

Economies of scaleEconomies of scale::• Expanding size or scope of markets helps to achieve economies of scale in Expanding size or scope of markets helps to achieve economies of scale in

manufacturing as well as marketing, R & D or distributionmanufacturing as well as marketing, R & D or distribution• Can spread costs over a larger sales baseCan spread costs over a larger sales base• Increase profit per unitIncrease profit per unitNew Market creation:Channel, Hidesign New Market creation:Channel, Hidesign

Competitor attacking all markets: Mercedes and BMW, Dell and : Mercedes and BMW, Dell and Toshiba.Toshiba.

Location AdvantagesLocation Advantages::Low cost markets may aid in developing Low cost markets may aid in developing competitive advantagecompetitive advantage

May achieve better access to: raw materials, low cost labor, key suppliers, Key May achieve better access to: raw materials, low cost labor, key suppliers, Key customers, Natural resourcescustomers, Natural resources

Deciding whether to go Deciding whether to go International or notInternational or not

Not all companies need an international Not all companies need an international presencepresence

Globalization may be triggered by several Globalization may be triggered by several factorsfactors

Risk and the ability to operate globally Risk and the ability to operate globally must be carefully assessed.must be carefully assessed.

One of the most important decisions in IB One of the most important decisions in IB is the mode of entering foreign marketis the mode of entering foreign market

Foreign Market EntryForeign Market Entry

ExportingExporting Licensing/FranchisingLicensing/Franchising Contract manufacturingContract manufacturing Management contractManagement contract Assembly operationsAssembly operations Fully owned manufacturing processFully owned manufacturing process Joint venturesJoint ventures Counter tradeCounter trade Strategic AlliancesStrategic Alliances

ExportingExporting The most traditional mode of entering The most traditional mode of entering

international marketsinternational marketsExporting is the appropriate strategy when one Exporting is the appropriate strategy when one or more of the following conditions prevail :or more of the following conditions prevail :

The volume of foreign business is not large The volume of foreign business is not large enough to justify production in the foreign enough to justify production in the foreign market.market.

Cost of production is highCost of production is high There are political or other risks of investment in There are political or other risks of investment in

that countrythat country

The market may not big enough in the The market may not big enough in the long termlong term

Exporting is attractive when the concerned Exporting is attractive when the concerned company has excess capacity. company has excess capacity.

Also exports ensure that the company has Also exports ensure that the company has other markets to cater when faced with other markets to cater when faced with stiff competition in home market or when stiff competition in home market or when home market reaches saturation levels.home market reaches saturation levels.

The two ways of exporting The two ways of exporting

Indirect exportingIndirect exportingDirect exportingDirect exporting

Direct exporting : Direct exporting : refers to the sale in the refers to the sale in the foreign market directly by the foreign market directly by the manufacturer. The sale is directly to the manufacturer. The sale is directly to the foreign customer or through a middleman foreign customer or through a middleman located in the foreign market.located in the foreign market.

A number of organizational arrangements A number of organizational arrangements are available to a company for carrying on are available to a company for carrying on direct export.direct export.

Export departmentExport departmentOverseas sales branches Overseas sales branches Establishing contacts with foreign based Establishing contacts with foreign based

distributors or agentsdistributors or agents

Indirect export : Indirect export : Here the company transfers the Here the company transfers the responsibility of the selling job to some other responsibility of the selling job to some other organization .organization .

Advantages : Advantages : Firm does not have to build up an international Firm does not have to build up an international

infrastructure.infrastructure. The risk involved is very lessThe risk involved is very less Ideal for companies starting exporting for the first Ideal for companies starting exporting for the first

timetime Also ideal for small sized companiesAlso ideal for small sized companies

DisadvantagesDisadvantages The development of overseas market depends to a The development of overseas market depends to a

very large extent on the middlemen and not on the very large extent on the middlemen and not on the firm producing the export goods.firm producing the export goods.

The two alternative channels available for Int. The two alternative channels available for Int. Exports are :Exports are :

1) International Marketing middlemen: 1) International Marketing middlemen: There are two important middlemen- merchants and There are two important middlemen- merchants and agents. The basic distinction between the merchant agents. The basic distinction between the merchant and the agent is that the merchant takes title to the and the agent is that the merchant takes title to the product he sells , while the agent does not.product he sells , while the agent does not.

Export merchants: The domestic based export Export merchants: The domestic based export merchant buys the manufacturer’s product and sells merchant buys the manufacturer’s product and sells it abroad on his own.it abroad on his own.

Export/trading houses: They buy from domestic Export/trading houses: They buy from domestic manufacturers and export abroad.manufacturers and export abroad.

Trading companies :they are into exports and Trading companies :they are into exports and imports for e.g Mitsubishiimports for e.g Mitsubishi

Agents /brokersAgents /brokers

2) Co-operative organizations: 2) Co-operative organizations: Piggyback marketing : (allied company Piggyback marketing : (allied company

arrangement)– one manufacturer uses its arrangement)– one manufacturer uses its overseas distribution facilities to sell the overseas distribution facilities to sell the products of one or more companies including its products of one or more companies including its ownown

Licensing and FranchisingLicensing and Franchising::

The licensor issues a license to a foreign The licensor issues a license to a foreign company to use manufacturing process, company to use manufacturing process, trademark, patent, trade secret or other trademark, patent, trade secret or other item of value for a fee or royalty. The item of value for a fee or royalty. The licensor gains entry at little risk, the licensor gains entry at little risk, the licensee gains production expertise. licensee gains production expertise.

Disadvantages: Disadvantages: The licensor has less control over the The licensor has less control over the

licensee than it does over its own licensee than it does over its own production and sales facilities. production and sales facilities.

If the licensee is very successful, it has If the licensee is very successful, it has given up profits.given up profits.

Also when the contract ends, it could Also when the contract ends, it could result in creation of a competitor.result in creation of a competitor.

To avoid this licensor usually supplies To avoid this licensor usually supplies some proprietary ingredients or some proprietary ingredients or components needed in the product (as components needed in the product (as coca-cola does)coca-cola does)

AA number of foreign companies have entered number of foreign companies have entered the Indian market by licensing.the Indian market by licensing.

IFB washing machine was manufactured IFB washing machine was manufactured under license from Bosch of Germany.under license from Bosch of Germany.

Nike International ltd entered India by Nike International ltd entered India by licensing to Sierra Industrial Enterprises. The licensing to Sierra Industrial Enterprises. The licensee would take care of quality control, licensee would take care of quality control, marketing and distribution operation and marketing and distribution operation and would pay Nike 5% royalty on ex-factory price would pay Nike 5% royalty on ex-factory price on both footwear and apparel.on both footwear and apparel.

Arvind Mills owns Indian marketing rights for Arvind Mills owns Indian marketing rights for leading US brands like Arrow, Lee and leading US brands like Arrow, Lee and Wrangler.Wrangler.

BAT (British American Tobacco Company) BAT (British American Tobacco Company) has given licenses in many countries for the has given licenses in many countries for the manufacture of their brand “555”. manufacture of their brand “555”.

In India ITC is the licensed producer of “555”In India ITC is the licensed producer of “555”Pepsi granted license to Heineken of Holland Pepsi granted license to Heineken of Holland

giving them the exclusive right to produce and giving them the exclusive right to produce and sell Pepsi in Holland.sell Pepsi in Holland.

Franchising is a more complete form of Franchising is a more complete form of licensing. licensing.

The franchiser offers a complete brand concept The franchiser offers a complete brand concept and operating system. and operating system.

The franchiser also supports in terms of training The franchiser also supports in terms of training of employees, quality assurance and advertising.of employees, quality assurance and advertising.

The franchisee invests the money and pays The franchisee invests the money and pays certain fees to the franchiser.certain fees to the franchiser.

McDonald’s has entered many countries by McDonald’s has entered many countries by franchising their retail concepts and making sure franchising their retail concepts and making sure that their marketing is culturally relevant.e.g that their marketing is culturally relevant.e.g

In Holland they serve burgers with beer.In Holland they serve burgers with beer. In India they cater to vegetarian tastes- McAloo In India they cater to vegetarian tastes- McAloo

Tikki and McPuff.Tikki and McPuff. Other examples are Dairy Queen, Domino’s Other examples are Dairy Queen, Domino’s

Pizza and KFC.Pizza and KFC.

NIIT and Aptech (SSI) have franchisees in NIIT and Aptech (SSI) have franchisees in Africa, South east Asia dn Middle east Africa, South east Asia dn Middle east countries.countries.

Hotel chains like Hilton also operate the Hotel chains like Hilton also operate the franchise way.franchise way.

Contract ManufacturingContract Manufacturing

Under contract manufacturing a company doing Under contract manufacturing a company doing international marketing contract with firm’s in foreign international marketing contract with firm’s in foreign countries to manufacture or assemble the products countries to manufacture or assemble the products while retaining the responsibility of marketing the while retaining the responsibility of marketing the product. This is a common practice in IB.product. This is a common practice in IB.

There are a number of multinationals which employ There are a number of multinationals which employ this strategy in India.this strategy in India.

E.g. HUL, Ponds,DellE.g. HUL, Ponds,Dell Samsung when it first entered India used Videocon Samsung when it first entered India used Videocon

facilities for manufacturing their products. The facilities for manufacturing their products. The marketing was done by Samsung personnel.marketing was done by Samsung personnel.

Advantages: Advantages: The company doesn’t have to commit resource The company doesn’t have to commit resource

for setting up production facilities.for setting up production facilities. It frees the company from the risks of investing It frees the company from the risks of investing

in foreign markets.in foreign markets. If idle production capacity is readily available in If idle production capacity is readily available in

foreign country, it enables the marketer to get foreign country, it enables the marketer to get started immediately.started immediately.

In many cases the cost of the product obtained by In many cases the cost of the product obtained by contract manufacturing is lower than if it were contract manufacturing is lower than if it were manufactured by the international firm.manufactured by the international firm.

It’s a less risky way to start by CM. If the business does It’s a less risky way to start by CM. If the business does not pick up sufficiently, dropping it is easy. But when you not pick up sufficiently, dropping it is easy. But when you have your own production facility , the exit is difficult.have your own production facility , the exit is difficult.e.g For many years Godrej Soaps manufactured Dettol e.g For many years Godrej Soaps manufactured Dettol for Reckitt and Coleman, Johnson’s Baby soap for J& J for Reckitt and Coleman, Johnson’s Baby soap for J& J and Ponds Dreamflower and Cold cream for Ponds and Ponds Dreamflower and Cold cream for Ponds (HUL)(HUL)

DisadvantagesDisadvantagesLess control on manufacturing so quality Less control on manufacturing so quality

could get compromised.could get compromised.Big risk of developing potential competitorsBig risk of developing potential competitors

Management ContractingManagement Contracting

The firm provides the management know-how and may The firm provides the management know-how and may or may not have an equity stake in the enterprise being or may not have an equity stake in the enterprise being managed.managed.

MC is a low risk method of getting into foreign market MC is a low risk method of getting into foreign market and it starts yielding returns right from the beginning. and it starts yielding returns right from the beginning.

The arrangement is even more attractive if the The arrangement is even more attractive if the contracting firm is given an option to purchase some contracting firm is given an option to purchase some shares in the managed company within the stated shares in the managed company within the stated period.period.

E.g. Tata Tea, Harrison Malayalam etc have contracts to E.g. Tata Tea, Harrison Malayalam etc have contracts to manage a number of plantations in Sri Lankamanage a number of plantations in Sri Lanka

Turnkey contractsTurnkey contracts TC are common in IB in the supply, erection and TC are common in IB in the supply, erection and

commissioning of plants as in the case of oil refineries, commissioning of plants as in the case of oil refineries, steel mills, cement etc.steel mills, cement etc.

Ä turnkey operation is an agreement by a seller to a Ä turnkey operation is an agreement by a seller to a buyer with a facility fully equipped and ready to be buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by operated by the buyer’s personnel, who will be trained by the seller.the seller.

Fully owned manufacturing Fully owned manufacturing facilitiesfacilities

Companies with long term and substantial Companies with long term and substantial interest in the foreign market establish fully interest in the foreign market establish fully owned manufacturing facilities.owned manufacturing facilities.

Advantages: Advantages: It provides the firm with complete control over It provides the firm with complete control over

production and quality production and quality It doesnot have the risk of developing potential It doesnot have the risk of developing potential

competitors as in the case of licensing and competitors as in the case of licensing and contract manufacturing.contract manufacturing.

DisadvantagesDisadvantagesCost of production could be Cost of production could be

higher in the foreign market.higher in the foreign market.There could be supply related There could be supply related

problems like shortage of skilled problems like shortage of skilled manpower, raw materialsmanpower, raw materials

There could be union related or There could be union related or political problems.political problems.

Assembly operations:Assembly operations:

In this concept , the company ships the parts to In this concept , the company ships the parts to the foreign country and only assembles the the foreign country and only assembles the product there (taking advantage of the labour product there (taking advantage of the labour cost). cost).

The final product could be sold in the foreign The final product could be sold in the foreign country and/or also taken back to the home country and/or also taken back to the home country.country.

Joint VenturesJoint Ventures

Any form of association which implies collaboration Any form of association which implies collaboration for more than a transitory period is a JV. Such a for more than a transitory period is a JV. Such a broad definition encompasses many diverse types of broad definition encompasses many diverse types of joint overseas operationsjoint overseas operations

Sharing of ownership and management in an Sharing of ownership and management in an enterpriseenterprise

Licensing/franchising agreementsLicensing/franchising agreements Contract manufacturingContract manufacturing Management contractsManagement contracts

As per most experts JV encompasses joint ownership As per most experts JV encompasses joint ownership venture .venture .

Joint VenturesJoint Ventures

The essential feature of a joint ownership The essential feature of a joint ownership venture is that the ownership and management venture is that the ownership and management are shared between a foreign firm and a local are shared between a foreign firm and a local firm. firm.

In some cases more than two parties are In some cases more than two parties are involved. e.g. Pepsi’s Indian joint venture involved. e.g. Pepsi’s Indian joint venture involved Voltas and Punjab Agro Industries involved Voltas and Punjab Agro Industries Corporation.Corporation.

e.g. in India are e.g. in India are Maruti Suzuki and Hero Honda. Maruti Suzuki and Hero Honda.

Strategic AlliancesStrategic Alliances

There are different types of alliances according to There are different types of alliances according to purpose or structure .Alliances as per purpose purpose or structure .Alliances as per purpose are as follows :are as follows :

Technology development alliances Technology development alliances like like research consortia , simultaneous engineering research consortia , simultaneous engineering agreementsagreements

Marketing, sales and service alliancesMarketing, sales and service alliances in in which a company makes use of the marketing which a company makes use of the marketing infrastructure of another company in the foreign infrastructure of another company in the foreign market for its products.market for its products.

Multiple activity allianceMultiple activity alliance which involves the which involves the combining of two or more types of alliances.combining of two or more types of alliances.While marketing alliances are often single While marketing alliances are often single country alliances ,as international firms take on country alliances ,as international firms take on different allies in each country , technology different allies in each country , technology development and operations alliances are development and operations alliances are usually multicountry since these kinds of usually multicountry since these kinds of activities can be employed over several activities can be employed over several countries.countries.

Strategic AlliancesStrategic AlliancesStrategic alliances as per structure are :Strategic alliances as per structure are : Equity based (Joint venture) and b) Non-equity based.Equity based (Joint venture) and b) Non-equity based. Non equity based alliances such as technology transfer Non equity based alliances such as technology transfer

agreements agreements , licensing agreements, marketing agreements are proving , licensing agreements, marketing agreements are proving to be to be more dynamic more constructive and more strategic.more dynamic more constructive and more strategic.

e.g The Star Alliance brings together many airlines –e.g The Star Alliance brings together many airlines –Lufthansa, United Airlines, Mexicana, Air Canada, Lufthansa, United Airlines, Mexicana, Air Canada, Austrian Airlines, British Midland, Singapore Austrian Airlines, British Midland, Singapore Airlines, ,Thai Airways, Air NewZeland, Asiana Airlines Airlines, ,Thai Airways, Air NewZeland, Asiana Airlines and Spainair-into a huge global partnership that allows and Spainair-into a huge global partnership that allows travelers to make nearly seamless travelers to make nearly seamless connection to about 700 destinations.connection to about 700 destinations.

Many strategic alliances take the form of marketing alliances . These Many strategic alliances take the form of marketing alliances . These fall into three major categories :fall into three major categories :

Promotional Alliances : One company agrees to carry a Promotional Alliances : One company agrees to carry a promotion for another company’s products or service.promotion for another company’s products or service. McDonald’s for e.g has often teamed up with Disney to McDonald’s for e.g has often teamed up with Disney to offer products related to current Disney films as part of offer products related to current Disney films as part of its meals for children.its meals for children.

Logistics Alliances : One company offers logistical Logistics Alliances : One company offers logistical services for another company’s product. services for another company’s product. For e.g Abbott laboratories warehouses and delivers all For e.g Abbott laboratories warehouses and delivers all of 3M’s medical and surgical products to hospitals of 3M’s medical and surgical products to hospitals across the US.across the US.

Pricing Alliances: One or more companies join in a Pricing Alliances: One or more companies join in a special pricing collaboration.special pricing collaboration.Hotel and rental car companies often offer mutual price Hotel and rental car companies often offer mutual price discounts.discounts.

Counter trade:Counter trade:

It is a form of international trade in which certain It is a form of international trade in which certain export and import transactions are directly linked export and import transactions are directly linked with each other and in which import of goods are with each other and in which import of goods are paid for by exports of goods , instead of money paid for by exports of goods , instead of money payments.payments.

Countertrade takes several forms. The following Countertrade takes several forms. The following are the most common among them.are the most common among them.

Barter : In this system , goods and services are mutually Barter : In this system , goods and services are mutually exchanged between two countries depending upon their exchanged between two countries depending upon their bargaining strengthbargaining strength

For e.g a countertrade deal between the MMTC and a For e.g a countertrade deal between the MMTC and a Yugoslavian company involved import of 50,000 tonnes Yugoslavian company involved import of 50,000 tonnes of rails of the value of about $38 million by the MMTC of rails of the value of about $38 million by the MMTC and the purchase by the Yugoslavian company of iron and the purchase by the Yugoslavian company of iron ore concentrates and pellets of the same value.ore concentrates and pellets of the same value.

Russia supplied newsprint and crude oil to Russia supplied newsprint and crude oil to India and India in turn supplied tea, India and India in turn supplied tea, garments, medicines to Russia.garments, medicines to Russia.

Counter trade:Counter trade: Compensation deal : Under this arrangement , the seller Compensation deal : Under this arrangement , the seller

receives a part of the payment in cash and the rest in receives a part of the payment in cash and the rest in products.products.

Counter purchase: Under the counter purchase Counter purchase: Under the counter purchase agreement the seller receives the full payment in cash agreement the seller receives the full payment in cash but agrees to spend an equivalent amount of money in but agrees to spend an equivalent amount of money in that country within a specified period.that country within a specified period.

e.g. Pepsi cola’s trade with erstwhile USSR – Pepsi got e.g. Pepsi cola’s trade with erstwhile USSR – Pepsi got paid in roubles for the sale of its concentrates in the paid in roubles for the sale of its concentrates in the USSR , but spent the amount for purchase of Russian USSR , but spent the amount for purchase of Russian products like Vodka and wine. products like Vodka and wine.

Daimler-Benz sold 30 trucks to Romania. From Romania Daimler-Benz sold 30 trucks to Romania. From Romania in exchange it got 150 jeeps.These jeeps were sold in in exchange it got 150 jeeps.These jeeps were sold in Ecuador in exchange for bananas. The bananas were Ecuador in exchange for bananas. The bananas were brought back by Benz into West Germany which was brought back by Benz into West Germany which was sold to a supermarket chain which finally paid them in sold to a supermarket chain which finally paid them in Deutsch Marks.Deutsch Marks.

In early 1980s , Boeing exchanged 10 747s for 34 million In early 1980s , Boeing exchanged 10 747s for 34 million barrels of Crude oilbarrels of Crude oil

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