Foreign Market Entry Strategies Module 2 PDF

FOREIGN MARKET ENTRY STRATEGIES MODULE 2 MGMT121n-Introduction to International Marketing 1st Semester: AY 2021-2022 Towards the end of the module, the students will be able to: 1. Describe and understand the main entry modes of indirect exporting and direct...

FOREIGN MARKET ENTRY STRATEGIES MODULE 2 MGMT121n-Introduction to International Marketing 1st Semester: AY 2021-2022 Towards the end of the module, the students will be able to: 1. Describe and understand the main entry modes of indirect exporting and direct exporting. 2. Describe and understand the main intermediate entry modes. 3. Describe and understand the main hierarchical entry modes. How can companies evaluate and select specific foreign markets to enter?  Foreign Market Entry Global marketers have to make a multitude of decisions regarding the entry mode which may include: (1) the target product/market (2) the goals of the target markets (3) the mode of entry (4) the time of entry (5) A marketing-mix plan (6) A control system to check the performance in the entered markets 4 Principal Motives for Int’l Expansion World Market Locations To seek lower Economies production factor costs Economies To expand sales and of Scale production volume Economies To exploit of Scope proprietary assets 5 Foreign Market Entry Strategies Continuum 6 Lesson 2.1 Export Modes Exports modes do not require investment in a foreign country. Indirect exporting uses intermediaries to sell its goods while Direct exporting sells products directly to the customers by the manufacturer. Going it Alone: Export HOME COUNTRY HOST COUNTRY Revenues MNC Customers Export of Goods 8 Exporting Indirect Exporting Export merchants Export agents Export management companies (EMC) Direct Exporting Firms set up their own exporting departments 9 Conditions favoring Export Limited sales potential in target country; required little product adaptation Distribution channels close to plants High target country production costs Liberal import policies High political risks 10 Going it Alone: Export Advantages Disadvantages Low initial investment Potential costs of trade Reach customers quickly barriers Transportation cost Complete control over Tariffs and quotas production Foregoes potential location Benefit of learning for future economies expansion Difficult to respond to customer needs well When Is Export Appropriate? Low trade barriers Home location has cost advantage 11 Customization not crucial  Lesson 2.2 Intermediate Modes In the intermediate modes, the parent company has no full ownership of the foreign entry mode. The firm can enter in the following mode: a.) Licensing, b.) Franchising c.) Contract manufacturing Licensing Agreement Licensing of Technology MNC Local Firm Fees and Royalties HOME COUNTRY HOST COUNTRY 13  Licensing Agreement Advantages Disadvantages Low initial investment Lack of control over operations Avoids trade barriers Difficulty in transferring tacit Potential for utilizing location knowledge economies Negotiation of a transfer price Monitoring transfer outcome Access to local knowledge Potential for creating a Easier to respond to competitor customer needs When Is Licensing Appropriate? Well codified knowledge Strong property rights regime Location advantage 14 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 15 Conditions favoring Licensing Import and investment barriers Legal protection possible in target environment Low sales potential in target country Large cultural distance Licensee lacks ability to become a competitor 16 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 17 License contract should include: Product and territorial coverage, Length of contract, Quality control, Grant back and cross licensing, Royalty rate and structure, Choice of currency, and Choice of law 18 Disadvantages to Licensing Limited participation Returns may be lost Lack of control Licensee may become competitor Licensee may exploit company resources 19 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 20  Franchising Advantages Disadvantages Overseas expansion  Revenues may not be with a minimum adequate investment  Limited franchising Franchisees’ profits tied to their efforts opportunities overseas Availability of local  Lack of control over the franchisees’ knowledge franchisees’ operations  Problem in performance standards  Cultural problems  Physical proximity 21  Contract Manufacturing (Outsourcing) Advantages Labor cost advantages Savings via taxation, lower energy costs, raw materials, and overheads Lower political and economic risk Quicker access to markets Disadvantages Contract manufacturer may become a future competitor Lower productivity standards Backlash from the company’s home-market employees regarding HR and labor issues Issues of quality and production standards 22 Lesson 2.3 Hierarchical Modes The hierarchical mode is also known as investment mode. This is an entry mode where the firm completely owns and controls the foreign entry mode. The parent company has full control of the subsidiary in the host country. The firm can enter through joint venture, merger, acquisition, or Greenfield. Investment Partial or full ownership of operations outside of home country Foreign Direct Investment Forms Joint ventures Minority or majority equity stakes Outright acquisition 24 Direct investment should be done when… Import barriers are minimal Small cultural distance between home and host country Assets cannot be fairly priced High sales potential Low political risks 25 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 26 Entering New Markets through Wholly Owned Subsidiaries Acquisitions and Mergers Quick access to the local market Good way to get access to the local brands Greenfield Operations Offer the company more flexibility than acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology. 27 Entering New Markets through Wholly Owned Subsidiaries Advantages Greater control and higher profits Strong commitment to the local market on the part of companies Allows the investor to manage and control marketing, production, and sourcing decisions 28  Entering New Markets through Wholly Owned Subsidiaries Disadvantages Risks of full ownership Developing a foreign presence without the support of a third part Risk of nationalization Issues of cultural and economic sovereignty of the host country 29 Foreign Acquisition HOME COUNTRY HOST COUNTRY Investment MNE Local Firm Profit 30 Foreign Acquisition Advantages Disadvantages Access to target’s local Uncertainty about target’s value knowledge Difficulty in “absorbing” Control over foreign acquired assets operations Infeasible if local market for Control over own technology corporate control is underdeveloped When Is Acquisition Appropriate? Developed market for corporate control Acquirer has high “absorptive” capacity High synergy 31 Going it Alone: “Green Field” Entry HOME COUNTRY HOST COUNTRY MNE Profit Investment New Subsidiary Company 32  Going it Alone: “Green Field” Entry Advantages Disadvantages Normally feasible Slower startup Avoids risk of Requires knowledge of overpayment foreign management Avoids problem of High risk and high integration commitment Still retains full control When Is “Green Field” Entry Appropriate? Lack of proper acquisition target In-house local expertise Embedded competitive advantage 33 Joint Venture HOME COUNTRY HOST COUNTRY MNE Local Firm Share of Inputs Profit Inputs Joint Venture Company Share of Profit 34  Joint Venture Advantages Disadvantages Access to partner’s local Potential loss of proprietary knowledge knowledge Reduction of concern about Potential conflicts between overpayment partners Both parties have some Neither partner has full performance incentives performance incentive Significant control over Neither partner has full operation control When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs Large expected mutual gains in the long-run Trade secrets can be walled off 35 Joint Ventures Advantages Higher rate of return and more control over the operations Creation of synergy Sharing of resources Access to distribution network Contact with local suppliers and government officials 36 Expanding through Joint Ventures Disadvantages Lack of control Lack of trust Conflicts arising over matters such as strategies, resource allocation, transfer pricing, ownership of critical assets like technologies and brand names 37 Conditions favoring JVs Import barriers Legal protection possible in target environment Large cultural distance Assets cannot be fairly priced High sales potential Some political risks Government restrictions on foreign ownership Local company can provide skills, resources, distribution network, brand name, etc 38 Common Market Entry Modes HOME COUNTRY HOST COUNTRY Licensing Acquisition MNE Local Firm Export Joint Venturing Joint Venture Company “Green Field” Entry New Subsidiary Company 39 Strategic Alliance A relatively new organizational form of market entry and competitive cooperation is strategic alliance. This form of corporate cooperation has been receiving a great deal of attention as large multinational firms still find it necessary to find strategic partners to penetrate a market. 40 Selecting the Target Market A crucial step in developing a global expansion strategy is the selection of potential target markets A four-step procedure for the initial screening process: 1. Select indicators and collect data 2. Determine importance of country indicators 3. Rate the countries in the pool on each indicator 4. Compute overall score for each country 41 Choosing the Mode of Entry Decision Criteria for Mode of Entry: Market Size and Growth Risk Government Regulations Competitive Environment/Cultural Distance Local Infrastructure Company Objectives Need for Control Internal Resources, Assets and Capabilities Flexibility 42 Timing of Entry International market entry decisions should also cover the following timing-of-entry issues: When should the firm enter a foreign market? Other important factors include: level of international experience, firm size Also, the broader the scope of products and services Mode of entry issues, market knowledge, various economic attractiveness variables, etc. 43 Exit Reasons for exit: Sustained losses Volatility Premature entry Ethical reasons Intense competition Resource reallocation 44  Exit Strategies Risks of exit: Fixed costs of exit Disposition of assets Signal to other markets Long-term opportunities Guidelines: Contemplate and assess all options to salvage the foreign business Incremental exit Migrate customers 45 -END- 46