International Market Selection Process PDF

The international market selection process 1 Agenda  International market selection process  Segmentation  Steps for the IMS  Choose the Mode of Entry 2 ENTRY MODES ENTRY MODES EXPORTING...

The international market selection process 1 Agenda  International market selection process  Segmentation  Steps for the IMS  Choose the Mode of Entry 2 ENTRY MODES ENTRY MODES EXPORTING INTERMEDIATE INVESTMENT DIRECT INDIRECT GREENFILED BROWNFIELD RISK CONTROL FLEXIBILITY Export Modes  Direct export modes: manufacturer sells directly or to an importer, agent or distributor, located in the foreign target market.  Direct Sales  A direct sales force may be required particularly for high- technology and big ticket industrial products  It may mean establishing an office with local and/or expatriate managers and staff, depending of course on the size of the market and potential sales revenues. 4 Direct export modes  Distributors Independent merchants who take possession and usually title of goods for resale. Usually will seek exclusive rights for a specific territory Represent the manufacturer/exporter in all aspects of sales and service May or may not handle other or competing products  Agents Represents an exporting company, and sells to wholesalers, retailers and sometimes end-users in the home country. Do not take title to goods Typically paid on commission May represent other companies’ products as well Indirect export modes  Indirect export modes: manufacturer uses independent export organizations located in its own country  Export buying agent: it is a representative of foreign buyers who resides in the exporter’s home country.  Broker: the chief function of a broker is to bring together a buyer and a seller. The broker is a specialist in performing the contractual function.  Export management company (EMC): it is a specialist company set up to act as the “export department” for a range of companies.  Trading companies: they play a central role in such diverse areas as shipping, warehousing, finance, technology transfer, planning resources development, insurance, etc. 6 Export modes Distributor Organizations 7 Exporting  The Internet  The Internet is becoming increasingly important as a foreign market entry method  Should not be overlooked as an alternative market entry strategy by the small or large company INTERMEDIATE ENTRY MODES Contract Manufacturing Licensing Franchising Joint Ventures/ Strategic Alliances Contract Manufacturing Contract manufacturing allows the firm to have foreign production without making a final commitment. Benetton relies upon a contractual network of small overseas manufacturers Contract Manufacturing is a business arrangement where a company (the contracting firm) hires a third-party manufacturer to produce goods on its behalf. This is commonly used by companies that want to outsource production but maintain control over design, branding, and (often) distribution. The third-party manufacturer may handle some or all aspects of the production process, from raw material sourcing to final assembly. Benefits of Contract Manufacturing 1. Cost Savings: Contract manufacturing can reduce production costs by leveraging the economies of scale of the third-party manufacturer, particularly in countries with lower labor and operational costs. 2. Focus on Core Competencies: By outsourcing manufacturing, the contracting company can focus on other business functions such as marketing, R&D, and sales, rather than investing in its own production facilities. 3. Scalability: Contract manufacturers allow companies to scale up production quickly in response to market demand without the need for significant capital investment in additional facilities or labor. 4. Access to Specialized Expertise: Many third-party manufacturers have specialized knowledge, advanced technologies, or specific production capabilities, giving companies access to higher quality products or more efficient production processes. 5. Reduced Risk: The contracting firm avoids risks associated with running a production facility (e.g., machinery breakdowns, labor disputes). 11 Problems of Contract Manufacturing 1. Loss of Control: Since the contracting firm is not directly overseeing the manufacturing process, they may face quality control issues or production delays, impacting their brand reputation. 2. Intellectual Property Risks: Sharing proprietary designs, formulas, or production processes with a third party exposes the company to the risk of intellectual property theft or imitation, especially in regions with weaker IP protections. 3. Dependency on Manufacturer: A business that relies heavily on a third-party manufacturer can become vulnerable if the manufacturer fails to meet deadlines, increases costs, or goes out of business. 4. Communication Barriers: Working with third-party manufacturers can lead to communication issues due to language differences, time zones, and cultural barriers, potentially resulting in misunderstandings or delays. 5. Hidden Costs: While contract manufacturing may seem cost-effective initially, hidden costs such as shipping, tariffs, and quality control expenses can erode the anticipated savings over time. 12 Licensing  A legal agreement where a licensor grants a licensee the right to use intellectual property (such as patents, trademarks, or technology) in exchange for a fee or royalty. The licensee produces and markets products under its own business model, using the licensor's intellectual property. 13 RIGHTS THAT MAY BE OFFERED IN A LICENSING AGREEMENT Patent covering a product or process Manufacturing know-how not subject to a patent Technical advice and assistance Marketing advice and assistance Use of a trade mark/trade name Licensing  Advantages  Capital is scarce: a company does not have sufficient capital to invest in large-scale operations, like setting up production facilities or distribution networks in foreign markets. By licensing, the company can still enter the market without committing significant resources.  Import restrictions forbid other means of entry: Licensing allows companies to bypass these restrictions by enabling a local partner to manufacture and sell products domestically.  a country is sensitive to foreign ownership: Licensing allows a foreign company to gain market access without owning the local operations  patents and trademarks must be protected against cancellation for nonuse. 12-15 Licensing  Risks  choosing the wrong partner  quality and other production problems: The licensee might not adhere to the quality standards set by the licensor, potentially leading to inferior products and affecting the brand’s reputation.  payment problems: Licensees may fail to make royalty payments on time or at all, creating financial issues for the licensor  contract enforcement: in some markets, enforcing a contract can be difficult due to weak legal systems or differing interpretations of laws  loss of marketing control: Licensing agreements typically grant the licensee significant autonomy, especially in marketing and distribution. This can result in marketing strategies that don’t align with the licensor's brand values or objectives, leading to diluted or inconsistent brand messaging. 12-16 Contract Manufacturing vs. Licesing  Contract Manufacturing: Apple  Licensing: Disney licenses its outsources the production of its characters to another company, iPhones to third-party manufacturers allowing them to produce and sell like Foxconn, while maintaining merchandise with those characters in control over design and marketing. exchange for royalty payments  The contracting company maintains  The licensor has less control over the significant control over product design, licensee's manufacturing process, quality standards, and production marketing strategies, and distribution processes, even though the actual channels. Once the intellectual manufacturing is done externally. property is licensed, the licensee has  The contracting firm bears the more autonomy in how the products financial risks related to marketing and are produced and sold, within the product development, but it reduces terms of the agreement. its operational costs by outsourcing  The licensor has a lower financial production. Quality control and investment and risk since the licensee intellectual property management takes on the responsibility for remain the company's responsibility. production, marketing, and sales. The licensor’s role is limited to overseeing 17 the agreement and collecting royalties. Contract Manufacturing vs. Licesing  Contract Manufacturing: Apple  Licensing: Disney licenses its outsources the production of its characters to another company, iPhones to third-party manufacturers allowing them to produce and sell like Foxconn, while maintaining merchandise with those characters in control over design and marketing. exchange for royalty payments  The contracting company generates  The licensor earns a steady stream of revenue by selling the finished goods it income through royalties or licensing produces through the contract fees, which are typically a percentage manufacturer. The third-party of the licensee’s sales. The licensee manufacturer is paid for the service earns profits from the sale of licensed and has no stake in the product's products. profits. 18 FRANCHISING The franchisor gives a right to the franchisee against payment, e.g. the right to use a total business/concept, including use of trade marks (brands), against some agreed royalty. A business model where a franchisor grants a franchisee the right to operate a business under the franchisor's brand and business model. The franchisee typically pays an upfront fee and ongoing royalties. Business format ‘packages’ Trade marks/ trade names/ designs Patents and copyrights Business know-how/ trade secrets Geographic exclusivity Store design Market research Location selection Human resources training Supply resources Licensing vs. franchising Licensing Franchising Products, or even a single product, are the Covers the total business, including know- common element how, intellectual rights, goodwill, trade marks and business contacts. Licenses are usually taken by well- Tends to be a start-up situation, certainly established businesses as regards the franchisee Terms of 16-20 years are common The franchisee agreement is normally for 5 years. Licensees enjoy a substantial measure of There is a standard fee structure and any free negotiations. variation within an individual franchise system would cause confusion and mayhem. The franchising system combines the knowledge of the franchisor with the local knowledge and entrepreneurial spirit of the franchisee 21 Franchising vs. Licensing Franchising: McDonald’s.  Licensing: Disney Franchisees operate licenses its characters individual restaurants but (e.g., Mickey Mouse) to must follow the toy manufacturers, McDonald's system, use allowing them to create the brand name, and sell and sell products featuring only McDonald’s products. the characters. The manufacturers operate their own businesses but pay Disney a fee for the right to use the characters. 22 INTERNATIONAL FRANCHISING WITH PAPA JOHN’S (PJ)  Franchise Support  Training. PJ provides training and development solutions and assistance with the development of trainers and training solutions.  Restaurant openings. PJ offers assistance with determining the ideal site, review of market trade areas and site criteria, the build-out of the restaurant, and ordering of equipment.  Operations. The company assists the franchisee with creating strategies and tactics to improve the operations, market penetration, and human resources development.  Food and supply chain. PJ develops partnerships with suppliers in each country to ensure that international franchisees receive the highest-quality ingredients and supplies at the best possible prices.  Marketing. PJ offers assistance in menu creation, long-term strategic planning, grand openings, and other marketing programs.  Information services. The firm’s information services department offers knowledge and tools to international franchisees to manage their operations.  Quality management. PJ has three teams that support Research & Development, Quality Assurance, and Quality Control worldwide.  Length of Contract: The initial term is ten years, with an option to renew for an additional 10-year term if certain criteria are met.  Franchise Fee: US$25,000  Ongoing Fees: Royalty fee of 5 percent of net sales is due monthly 23 International Joint Ventures (I) Equity JV – two or more partners have different relative ownership shares (equity percentages) in the new venture. Nonequity JV (strategic international alliance) – agreements are carried out through contract rather than ownership sharing Problems: partner selection; definition of mutual beneficial working agreement; management skills 24 International Non Equity Joint Ventures 25 International Non Equity Joint Ventures  Firms enter into SIAs for several reasons: ▪ opportunities for rapid expansion into new markets ▪ access to new technology ▪ more efficient production and innovation ▪ reduced marketing costs ▪ strategic competitive moves and ▪ access to additional sources of products and capital. 26 International Equity Joint Ventures  The reason IJVs are popular is to partner with a local company to get around the rules, regulations and tariffs that foreign companies may be subject to. This is the most common reason for foreign companies to IJVs in countries like China and South Korea.  Moreover: 1. Complementary technology 2. High costs in R&D and production 3. Increase the speed of market entry 27 Foreign direct investment (FDI)  1.Acquisition: taking over an existing business quick entry and may provide access to distribution channels and existing customer base might be the only feasible way to establish operations when the market is saturated, highly competitive or has substantial entry barriers  2. Greenfield investment: building from the ground may be necessary when acquisition targets are unavailable, too costly or obsolete  3. Brownfield investment: combination of existing business and upgrading investment Foreign Direct Investment Reasons to invest in foreign country.  Capitalize on low-cost labor.  Avoid high import taxes.  Reduce high costs of transportation to market.  Gain access to raw materials and technology.  Gain market entry faster than competitors. 29 ENTRY MODES & STRATEGIES EXPORT MODES 100% resource EXTERNALIZATION ( control;  risk;  flexibility) Partial resource EXTERNALIZATION (shared risk and control; INTERMEDIATE shared ownership) MODES INVESTMENT MODES 100% resource INTERNALIZATION (control;  risk;  flexibility) IMPORTANT FACTORS THAT AFFECT THE FOREIGN ENTRY MODES DECISIONS Transaction costs  «A firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange on the open market» (Coase, 1937, p. 395).  Transaction costs emerge when markets fail to operate under the requirements of perfect competition.  Firms internalize, integrate vertically, to reduce transaction costs.  If the transaction costs through externalization (importer) are higher than the control through an internal hierarchical system, then the firm should seek internationalization of activities in wholly owned subsidiaries. 33