MODULE 7
ENTRY STRATEGY AND STRATEGIC ALLIANCES
Enumerate the following:
1. Modes For Serving Foreign Market
Firms can use six different modes for serving foreign markets such as exporting, turnkey
projects, licensing, franchising, establishing joint ventures with a host-country firm, or
setting up a new wholly owned subsidiary in the host country.
Exporting
The direct sale of goods and/or services in another country is known as exporting. It is
possibly the most well-known and risk-free method of entering a foreign market. It may
also be less expensive because you will not need to invest in manufacturing facilities in
your chosen country; all goods are still manufactured in your home country and shipped
to foreign countries for sale. Rising transportation costs, on the other hand, are likely to
raise the cost of exporting in the near future.
***The majority of costs involved with exporting come from marketing expenses.
Usually, you will need the involvement of four parties: your business, an importer,
a transport provider and the government of the country of which you wish to export
to.
Turnkey Projects
Some industries have firms that specialize in the design, construction, and startup of
turnkey plants. The contractor agrees to handle every detail of the project for a foreign
client, including training of operating personnel, in a turnkey project. At completion of the
contract, the foreign client is handled the “key” to a plant that is ready for full operationhence the term turnkey. This is a technique for transferring process technology to other
countries. Turnkey projects are most common in the chemical, pharmaceutical, petroleum
refining, and metal refining industries, which all rely on complex, costly production
technologies.
Licensing
Licensing your property allows another company in your target country to use it. The
property in question is normally intangible, such as trademarks, manufacturing
techniques, or patents. The licensee will pay a fee to have the right to use the property.
***Licensing requires very little investment and can yield a high return on
investment. The licensee will also bear the costs of manufacturing and marketing
in the foreign market.
Franchising
Franchising is essentially a specialized form of licensing in which the franchiser not only
sells intangible property (typically a trademark) to the franchisee, but also requires the
franchisee to agree to strict business rules. The franchiser will frequently provide ongoing
assistance to the franchisee in running the business.
****Franchising is somewhat similar to licensing in that intellectual property rights
are sold to a franchisee. However, the rules for how the franchisee carries out
business are usually very strict – for example, any processes must be followed, or
specific components must be used in manufacturing.
Joint Ventures
A joint venture entails establishing a firm that is jointly owned by two or more otherwise
independent firms. One of the owners will be a local business (local to the foreign market).
The two companies would then provide the new business with a management team and
share control of the joint venture.
***Fuji-Xerox for example, was set up as a joint venture between Xerox and Fuji
Photo. Establishing a joint venture with a foreign firm has long been popular mode
for entering a new market. The most typical joint venture is a 50/50 venture, in
which there are two parties, each of which holds a 50 percent ownership stake and
contributes a team of mangers to share operating control.
Wholly Owned Subsidiaries
A wholly owned subsidiary (WOS) is somewhat similar to foreign direct investment in that
money goes into a foreign company but instead of money being invested into another
company, with a WOS the foreign business is bought outright. It is then up to the owners
whether it continues to run as before or they take more control of the WOS.
****Additionally, in a wholly owned subsidiary, the firm owns 100 per cent of the
stock. Establishing a wholly owned subsidiary in a foreign market can be done in
two ways. The firm can either set-up a new operation in that country often referred
to as a green-field venture, or it can acquire an established firm in that host nation
and use that firm to promote its products.
2. Advantages of Licensor and Licensee
A licensing agreement is a legal agreement between a licensor and a licensee. The owner
of a product, idea, or service is known as the licensor. The organization that will
manufacture, market, and sell a product, service, or idea is known as the licensee. The
licensor will be paid a royalty in exchange for the rights to the product or idea.
Advantages of Licensing
The advantages of licensing can be viewed from two perspectives: licensor and licensee.
Advantages to the licensor include:
1. The licensor being able to utilize the licensee’s distribution network to quickly enter
into new geographical regions and foreign markets
2. The licensor facing lower capital requirements and lower costs due to not having
to invest in distribution
3. The licensor having the ability to generate passive revenues through royalties
4. The licensor being able to gain the expertise and skills of the licensee.
Advantages to the licensee include:
1. The licensee gaining access to established intellectual property and being able to
enter the market more quickly
2. The licensee not having to pool resources to conduct research and development
to develop their own products or services
3. The licensee being able to generate revenues by using the intellectual property of
the licensor
3. Advantages and Disadvantage of Exporting
Advantages of exporting
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You could significantly expand your markets, leaving you less dependent on any
single one.
Greater production can lead to larger economies of scale and better margins.
Your research and development budget could work harder as you can change
existing products to suit new markets.
It minimizes both risk and capital requirements and it is conservative way to test
the international waters.
***With an export strategy the manufacturer can limit its involvement in foreign
markets by contracting with foreign wholesalers experienced in importing to
handle the entire distribution and marketing function in their countries or regions
of the world. If it is more advantageous to maintain control over these functions, a
manufacturer can establish its own distribution and sales organizations in some or
all of the target foreign markets. Either way, a firm minimizes its direct investments
in foreign countries because of its home-based production and export strategy.
Disadvantages of exporting
Exporting from the firm’s home base may not be appropriate if there are lower cost
locations for manufacturing the product abroad (i.e., if the firm can realize location
economies by moving production elsewhere).
High transport costs can make exporting uneconomical, particularly for bulk products.
One way of going around is to manufacture bulk products regionally.
Tariff barriers can make exporting uneconomical. Similarly, the threat of tariff barriers by
the host-country government can make it very risky. (iv) Exporting through local agent
may not be good proposition since foreign agents often carry the products of competing
firms and so have divided loyalties.
Direction: Identify the answers to the following statement.
Joint Ventures
1. It is a business agreement in which parties agree to develop a new
entity and new assets by contributing equity. They exercise control over the enterprise
and consequently share revenues, expenses and assets.
Exports
2. This refers to selling goods and services produced in the home
country to other markets in other countries.
Franchising
3. It is basically a specialized form of licensing in which the franchiser
not only sells intangible property (normally a trademark) to the franchisee, but also insists
that the franchisee agree to abide by strict rules as to how it does business.
Imports
4. This is derived from the conceptual meaning, as to bringing in the
goods and services into the port of a country. An import in the receiving country is an
export to the sending country.
Licensing Agreement 5. This is a written contract between two parties, in which a property
owner permits another party to use that property under a specific set of parameters.
Licensor
6. The party providing the intellectual property is called the?
Licensee
7. This refers to the party receiving the intellectual property is called
the?
Turnkey Projects 8. In this project, the contractor agrees to handle every detail of the
project for a foreign client, including training operating personnel. At completion of the
contract, the foreign client is handed the “key” to a plant that is ready for full operation.