Global Market Entry Modes
Prof. A.K. Sengupta
Former Dean, Indian Institute of Foreign Trade
1
Global Market Entry Modes
Commitment to Export
Analyse
External Factors
Internal Factors
Decide on
-Product
-Market Environment
-Competitive Profile
-Resources
International Market Involvement
Market Identification & targeting
Entry mode Selection
Marketing Mix
*Product *Price *Distribution *Promotion
Set Targets
Implement
Organise
Department
Subsidiary
Jt. Venture
Export House
Export
Review
Modify
Set new target
Allocate Resources
*Product
*Arrange Resources
2
The Concept of International Market Entry
• An institutional mechanism by which a firm
makes 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 company’s 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 the
international markets and select the most suitable one.
• This decision is to be taken with utmost care—Not only is
the financial resources in stake but the extent to which the
company‘s marketing strategy can be employed in the new
market also depends on this decision.
4
•
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
resources.
and willingness of the firm to commit
ii) The firm’s desire to have a level of control over
international operations.
iii) The level of risk the firm is willing to take
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Alternative Entry Modes
Production in Foreign Country
Production in Home Country
Exports
Indirect
International
Licensing
B&T
Providing Offshore
Services
Contractual Mode
Direct
International
Franchising
BOT
Overseas
Assembly or
Mixing
Turnkey
Projects
Management
Contract
International
Strategic
Alliance
Investment Mode
Joint Venture
Wholly
Owned
Foreign
Subsidiarie
s
Contract
Manufacturing
BOO
Distribution
Access
Technology
Alliance
Production
Alliance
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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 located
intermediary—an 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 India
•Trading 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 Star Export House
15 Crore
Two Star Export House
100 Crore
Three Star Export House
500 Crore
Four Star Export House
1500 Crore
Five Star Export House
5000 Crore
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•Functions of Trading Houses
Market selection and market research
Customer identification and evaluation
Commercial and technical negotiations
Vendor development
Product/packaging adaptation
Imports, particularly of items required for export
production
Provide protection against export risk
Financial arrangements including securing credit
Export documentation and shipping
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•Direct Exports
A firm’s product is directly sold to importers-Sole
distributor
Foreign country based intermediaries--Agents
Company owned Sales Offices
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Exporting through Agents
The basic duty of an agent is to secure orders in the name of and on account of the principal—does
not trade on his own—gets commission on the basis of orders secured.
Advantages of having 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 principal’s 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 company’s 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 firm’s 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 company’s 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. Exporters
should 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 the
order.
•
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 export directly to their own sales
subsidiaries
abroad,
side-stepping
independent
intermediaries
• Sales subsidiary assumes the role of the independent
distributor by stocking the manufacturers products ,selling
to buyers, and assuming the credit risk
• The sales- subsidiary offers the manufacturer full control
of selling operations in a foreign market
• Example—General Motors exports its Saturn cars to Japan
through two of its sales subsidiaries. It side stepped
Yanase, its Japanese importer. Its vigorous marketing21effort
made it possible to sign up 20 dealers in one year.
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 are
beneficiaries 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 of Licensing
•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 operation
available to an overseas company (Franchisee)
• It includes the brand name, logo, products and method of
operation
• Mc. Donald’s, 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
5/10 Years – renewable
15-20 years
Licensing tends to be self selecting.
They are often established businesses
and can demonstrate that they are in a
strong position to operate the license
in 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
There is no goodwill attached
to the licensing as it is totally
retained by licensor
Licensee enjoys substantial
measure of fee negotiation
Lesser control
Franchisor passes to the
franchisee the benefits of
on-going research programs
Although franchisor does
retain the goodwill, the
franchisee picks up an
element
of
localized
goodwill
Standard fee structure. Any
variation will cause
confusion
Exerts higher control
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Overseas Turnkey Projects
•
Companies utilize technical expertise 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 period
before 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 financial
institutions – 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 for
a specific duration to an overseas firm.
• Low risk, low cost mode of entry.
• Earn foreign exchange and optimally utilize its skilled
manpower
• 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 that
cooperate with each other to achieve common goals but do not
form 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 of
resources and the venture develops on its own
Joint Venture
Parent Company X
Company X
(Joint Venture)
Parent Company Y
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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 other’s experience-No
equity participation
Strategic Alliance
Contractual
Company X
Agreement
Company 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 excess to the distribution channels of partner
firms
Types of Alliance
Alliances involved either distribution access or
technology transfers .
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Distribution Access
•
Exporter uses overseas distribution channel of another
firm
•
Exporting 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 out
with 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
37
Limitations
• Carrier – concern about quality continuity of supply.
Rider – handing over full control off distribution to
carries which may not be compatible with firms long
term marketing goal.
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Examples
•
Wrigley’s (US based chewing gum company) entered
Indian markets using Parry’s 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 Europe
including U K .
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• MG
Rover identified the need to introduce a small car
which would target the CITY Car sector- Tata Indica
fitted the Co’s 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 names
Nescafe and Nestea
Technology Alliance
Biotech and Pharmaceutical industry
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• To develop medicine market in Poland Ranbaxy has
forced strategic alliance with Smithkline and Schnarz
Pharma
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Contract Manufacturing
• An international firm arranges to have its
products manufactured by an offshore local
company on contractual basis
• Local manufacturers responsibility is only
production
• Marketing responsibility is on Parent
company
• No legal bindings – change contracted
manufacturers to improve quality and cost
effectiveness
• 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 and
India
•
E.g. Taiwan – world leader in semi conductors, China –
30% AC, 24% washing machines, 16% refrigerators sold
in the USA. Nike shoe – entirely manufactures through
contractual basis
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Example :
1. Chrysler has contract manufacturing arrangement with
Daimler-Punch an Austrian group to build its jeep
Cherokee 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 of
entry is local production of company’s
products.
Types:
• Overseas Assembling
• Joint Venture
• Wholly Owned Subsidiaries
45
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
46
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
47
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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 switch
suppliers
 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
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production in USA
• Moving with established customer
 In many industries, important suppliers keep a relationship by
establishing plants near customer locations – when customers build
new plants elsewhere, suppliers move too particularly among Car
manufacturers and part suppliers
• Ownership Strategy
 Company’s 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 exports components in CKD condition and
assembles them overseas e.g Mahindra &Mahindra, has
entered 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 Venture
Under a joint venture arrangement a foreign company
invites an outside partner to share stock ownership in the
new unit –minority or majority or 50:50share
Reasons for JV
• By bringing in new partner , company share the risk for a
new 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 environment—govt regulations—JV
Mc Donald’s entered Japan in 1971 through JV with Fujita
&Co
Mc Donald’s in India through JV
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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 competitive
response
 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
countries—raw material. labour
 Avoids conflicts with overseas partners
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•Limitations:
 Need substantial financial and other operational
resources
 Need
substantial international exposure
before
establishing WOS.
• Ways of establishing WOS
 Acquisition
 Greenfield operation
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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
company’s 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
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their own screening criteria Example page 47
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