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GLOBAL MARKET
ENTRY STRATEGIES
12-1
Decisions of Modes of Entry
Companies which desire to enter in global markets face
dilemma while deciding the method of entry.
This dilemma can be solved some extent by considering the
following factors.
1. Ownership Advantage
2. Location Advantage
3. Internationalization Advantage
Ownership Advantage: benefit by owning resources, which
provides a competitive advantage to the company over its
competitors.
Ex: TISCO owned its iron ore mines and coal mines, which gives
the advantage of low cost production.
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Location Advantage: facilities related to manufacturing located in
host country benefits a company, such as
customer needs, preferences &tastes
Logistics requirements
Cheap labour
Cheap land and acquisition cost
Political stability
Low cost raw materials
Climatic conditions
If a company has a location advantage it enters foreign markets
through direct investments. Otherwise, it enters through
exporting.
Internationalization Advantage: the benefits that a company gets
by manufacturing goods or rendering services in the host country
by itself rather than through contract arrangements with the
companies in the host country.
Ex: Toyota enters foreign markets through direct investment and
joint ventures as the local companies in foreign countries can not
produce as efficiently as Toyota.
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Basic Entry Decisions
12-5
Timing of Entry
First mover disadvantages - the disadvantages associated with
entering a foreign market before other international businesses
These may result in pioneering costs (costs that an early
entrant has to bear that a later entrant can avoid) such as
the costs of business failure if the firm, due to its ignorance
of the foreign environment, makes some major mistakes
the costs of promoting and establishing a product offering,
including the cost of educating the customers
Scale of Entry
Firms that enter foreign markets on a significant scale make a
major strategic commitment that changes the competitive
playing field
involves decisions that have a long term impact and are
difficult to reverse
Small-scale entry can be attractive because it allows the firm
to learn about a foreign market, but at the same time it limits
the firm’s exposure to that market.
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Modes of entry
Different Modes of Entry to International Business:
Exporting
Licensing
Franchising
Contract Manufacturing
Assembly and Integrated Manufacturing
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Exporting
1. Exporting is often the first method firms use to enter foreign market.
Simplest and widely used mode of entering foreign markets.
Advantages of exporting:
Need for limited finance
Low risk
Motivation for exporting
Forms of Exporting:
Indirect exporting- exporting the products in their original form or in the modified form
to a foreign country through another domestic company.
Ex: Himalaya publishers sells their books to various exporters which in turn exports these
books to various foreign countries.
Direct exporting- selling the products in a foreign country directly through its distribution
or through its host country’s company.
Ex: Baskin Robbins exported its ice creams to Russia in 1990 and later opened 74 outlets
with Russian partners. Finally established ice cream plant in Moscow.
Intra-corporate transfers- selling of products by a company to its affiliated company in
host country.
Ex: Selling of products by Hindustan Lever in India to Unilever in the USA. Which is treated as
exports in India and imports in the USA
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Factors to be considered:
Government policies, like export policies, import policies,
export financing, foreign exchange etc.
Marketing factors-image, distribution network,
responsiveness to the customer, customer awareness and
preferences.
Logistical consideration-physical distribution, warehousing,
packaging, transporting, inventory carrying cost
Distribution issues: own distribution, host country distribution.
Export Intermediaries:
Export management companies-acts as export department
of exporting firm(client)
Cooperative society-domestic companies exports goods
through this society which undertakes the exporting
operations of its members.
International trading company-buys the goods from
domestic company and exports.
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Export Intermediaries:
Manufacturer’s Agents- seek domestic orders for foreign
manufacturers, works on commission base.
Manufacturer’s Export Agents- sells the domestic
manufacturer’s products in foreign markets and acts as
their foreign sales department.
Export and import brokers- bridges the gap between
exporters and importers and brings both the parties
together.
Freight forwarders-helps domestic manufacturers in
exporting goods such as physical transportation, arranging
customs documents, transportation services.
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2. LICENSING
LICENSING- The domestic manufacturer leases the right to use its
intellectual property to a manufacturer in a foreign country for a fee.
Intellectual property include Technology, Work methods, Patents,
Copyrights, Brand names , Trademarks.
Popular method of entering foreign markets.
Cost of entry is less.
Domestic company need not invest any capital.
Domestic company earns revenue with out additional investment.
Licensing process:
Licensor Licensor
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12-13
3. Franchising
Franchising is a form of licensing.
Under franchising, an independent organisation called
franchises operates the business under the name of
another company-franchisor.
The franchisor provides following services to the franchisee
Trade marks
Operating systems
Product reputations
Continuous support systems like advertising, employee
training, reservation services, quality assurance
programmes, etc.
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Franchising Agreements:
Franchisee has to pay a fixed amount and royalty based on
the sales to the franchiser.
Franchisee should agree to adhere to follow the franchisor’s
requirements like appearance, financial reporting, operating
procedures, customer service etc.
Franchisor helps the franchisee in establishing the
manufacturing facilities, services facilities, provides expertise,
advertising, corporate image etc.
Franchisor allows some degree of flexibility in order to meet
the local tastes and preferences.
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12-16
Contract manufacturing
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5. Joint ventures with a host country firm - a firm that is jointly owned by
two or more otherwise independent firms
most joint ventures are 50:50 partnerships
Advantages:
Benefit from local partner’s knowledge.
Shared costs/risks with partner.
Reduced political risk.
Disadvantages:
Risk giving control of technology to partner.
May not realize experience curve or location economies
Shared ownership can lead to conflict.
6. Wholly owned subsidiary - the firm owns 100 percent of the stock
set up a new operation
acquire an established firm
Advantages:
No risk of losing technical competence to a competitor.
Tight control of operations.
Realize learning curve and location economies.
Disadvantage:
Bear full cost and risk.
12-18
Turnkey projects
Turnkey projects involve a contractor that agrees to handle every
detail of the project for a foreign client, including the training of
operating personnel
at completion of the contract, the foreign client is handed the
"key" to a plant that is ready for full operation
Turnkey projects are attractive because
they allow firms to earn great economic returns from the know-
how required to assemble and run a technologically complex
process
they are less risky in countries where the political and
economic environment is such that a longer-term investment
might expose the firm to unacceptable political and/or
economic risk
Turnkey projects are not attractive when
the firm's process technology is a source of competitive
advantage
12-19
Advantages and
Disadvantages of Entry Modes
Entry Mode Advantage Disadvantage
Exporting Ability to realize location and High transport costs
experience curve economies Trade barriers
Problems with local marketing
agents
Turnkey Ability to earn returns from Creating efficient competitors
contracts process technology skills in Lack of long-term market
countries where FDI is presence
restricted
Licensing Low development costs and Lack of control over technology
risks Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
12-20
Advantages and Disadvantages
of Entry Modes
Entry Mode Advantage Disadvantage
12-21
Selecting an Entry Mode
Technological Know-How Wholly owned subsidiary, except:
1. Venture is structured to reduce
risk of loss of technology.
2. Technology advantage is
transitory.
Then licensing or joint venture OK.
Management Know-How Franchising, subsidiaries
(wholly owned or joint
venture).
14-16
12-22
Which Entry Mode Is Best?
12-23
How Do Core Competencies Influence
Entry Mode?
12-24
How Do Pressures For Cost
Reductions Influence Entry Mode?
When pressure for cost reductions is high, firms are
more likely to pursue some combination of
exporting and wholly owned subsidiaries
allows the firm to achieve location and scale
economies and retain some control over
product manufacturing and distribution
firms pursuing global standardization or
transnational strategies prefer wholly owned
subsidiaries
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Which Is Better –
Greenfield or Acquisition?
The choice depends on the situation confronting the firm
1. A greenfield strategy - build a subsidiary from the scratch
a greenfield venture may be better when the firm needs to
transfer organizationally embedded competencies, skills,
routines, and culture
2. An acquisition strategy – acquire an existing company
acquisition may be better when there are well-
established competitors or global competitors
interested in expanding
The volume of cross-border acquisitions has been rising for
the last two decades
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What Are Strategic Alliances?
12-27
Why Choose Strategic Alliances?
12-29
What Makes Strategic Alliances Successful?
2. Alliance structure
The alliance should
make it difficult to transfer technology not
meant to be transferred
have contractual safeguards to guard
against the risk of opportunism by a partner
allow for skills and technology swaps with
equitable gains
minimize the risk of opportunism by an
alliance partner
12-30
What Makes Strategic Alliances
Successful?
3. The manner in which the alliance is
managed
Requires
interpersonal relationships between
managers
cultural sensitivity is important
learning from alliance partners
knowledge must then be diffused
through the organization
12-31
The Strategic Management Process
External
Analysis
Which Businesses
Internal to Enter?
Analysis
Corporate Level • Vertical Integration
Strategy • Diversification
• Strategic Alliances
• mode of entry
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Motivation for Alliances
Create economic value by:
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Three Types
Of
Alliances
Nonequity Joint
Alliance Venture
Contracts Joint Equity
Equity
• licensing Alliance Holdings
• supply & • independent
distribution Cross Equity firm is
agreements Holdings created
• partners own
stakes in
eachother
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How Strategic Alliances Create Value
Value
Creation Shaping the Competitive Environment
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How Strategic Alliances Create Value
12-37
How Strategic Alliances Create Value
Facilitating Entry and Exit
Low-cost entry into new industries
• a partner provides instant access and legitimacy
Managing uncertainty
• alliances may serve as ‘real options’
Low-cost entry into new geographic markets
• partners provide local market knowledge, access,
and legitimacy with governments and customers
12-38
Modes of Foreign Direct Investments
through alliances
Mergers and Acquisitions
Joint company ventures
Mergers and Acquisitions:
Domestic companies enter international business through
mergers and acquisitions.
A domestic company selects a foreign company and merges
itself with the foreign company in order to enter international
business.
The domestic company may purchase the foreign company
acquires its ownership and control.
Ex: Mittal steel -Arcelor
12-39
Joint Venture
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12-41
Cost-Benefit Analysis
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Cost-Benefit Analysis
Two Steps
12-43
Cost-Benefit Analysis
Cost Estimation
Estimate costs to compare with
benefits/other investment options
Overall estimation based on
Estimation of required activities (structure)
Estimation for each activity
Estimation of installation/setup cost
Estimation of operational cost
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Cost-Benefit Analysis
Cost Category
Development costs
Setup costs
Operational costs
12-45
Cost-Benefit Analysis
Development Costs
Software
12-46
Cost-Benefit Analysis
Setup Cost
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Cost-Benefit Analysis
Operational Costs
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Cost-Benefit Analysis
Benefit Estimation
12-49
Cost Benefits Analysis
Direct Benefits
12-52
Cost Benefits Analysis
Intangible Benefits
12-53
Cash Flow Forecasting
Cash Flow Analysis
12-55
Cost-Benefit Evaluation
Techniques
Techniques
Net profit
Payback period
Return on investment
Net present value
Internal rate of return
12-56
Cost-Benefit Evaluation Techniques
Net Profit
Difference between total cost and total
income
Pros: Easy to calculate
Cons
Does not show profit relative to size
investment (e.g., consider Project 2)
Does not consider timing of payments (e.g.,
compare Projects 1 and 3; income comes
late in Project 1)
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Cost-Benefit Evaluation Techniques
Payback Period
12-58
Cost-Benefit Evaluation Techniques
Payback Period
12-59
Cost-Benefit Evaluation Techniques
Payback Period
The Payback Period approach states that all
projects with a Payback Period less than a
specified number of years should be
accepted
12-60
Cost-Benefit Evaluation Techniques
Return On Investment
12-61
Cost-Benefit Evaluation Techniques
Return On Investment
12-62
Cost-Benefit Evaluation Techniques
Net Present Value
12-63
Cost-Benefit Evaluation Techniques
Net Present Value
12-64
Cost-Benefit Evaluation Techniques
Internal Rate of Return
Pros
Calculates
figure which is easily
comparable to interest rates
Cons: Difficult to calculate (iterative)
Standard way to compare projects
12-65