T4 Choice of Foreign Market Entry Modes PDF

SECTION 2 Unit 4: Choice of foreign market entry modes Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Teaching Blocks 2 Contents 1. Entry strategies and the influential factors...

SECTION 2 Unit 4: Choice of foreign market entry modes Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Teaching Blocks 2 Contents 1. Entry strategies and the influential factors when selecting them 2. Models to assess and select the entry mode and strategy *Images in these slides have been downloaded from the internet for teaching purposes. They are property of third parties. 3 Contents 1. Entry strategies and the influential factors when selecting them 2. Models to assess and select the entry mode and strategy 4 What possible Entry Strategies do you know? Pros and Cons? 5 Entry strategies and the influential factors when selecting them → How do we enter a new geographical market (country)? What entry mechanism should we choose? 3 basic groups of entry mechanisms exist according to classic criteria: Control, Commitment and Risk: Export modes (indirect export, direct export via agents, etc.) Contractual modes (e.g. licensing, franchising, contract manufacturing) Investment equity entry modes (e.g. joint ventures, wholly-owned subsidiaries). Depending on the internationalization strategic plan and strategic goals one or other mechanism will suit best 6 Entry strategies 7 Control and Commitment associated with entry strategies (Pla Barber et al., 2016) 8 1. Export Method with less risk and effort → Avoid many of the fixed costs of doing business abroad Entry strategy mostly used as the first way to penetrate a new market Types: Indirect and Direct → Depends on: ○ Company size ○ Risk tolerance ○ Available resources ○ Nature of the products or services, among others 9 Export Indirect / Passive The company sells its products in foreign markets through other companies (independent intermediaries, trading companies, export consortia) who are in charge of the complications of international operations. → Contacts with the buyer in the other country, logistics, foreign trade documentation, health procedures, etc. will be carried out by the intermediaries. The main disadvantage of this modality is the total absence of control on the marketing strategies applied to the product. → The exporter is totally disconnected from the export process. → Not in contact with the final consumer → the information received from the market is very scarce. It includes the re-sellers → selling the product or service to B2C (consumer) or B2B (company/ retailer: clients) 10 Export Direct Active stage → The company seeks to establish itself in a number of key markets. Export activity as a regular activity → It is integrated into the structure of the company through its own export departments. The search for contacts, market research, documentation management, physical distribution, as well as the establishment of pricing and brand policies is carried out within the company itself. Implies a higher level of resource commitment, but a substantial improvement is also obtained in the control of foreign operations and customers greater security in after-sales services. 11 2. Licencing Signing of a contract between the holder of a transferable right and another company, through which the latter is authorized, under certain circumstances, to make use of said right in exchange for an initial fixed payment and/or a periodic payment related to the sales figure. Rights → in intangible assets (registered trademark, a patent, specific know-how, or aspects related to the technological process). Different types of licenses → differences in the rights of the parties in making decisions, controlling processes and influencing the operations of the licensee. 12 Licencing Distribution Agreements Distribution of products in other countries through other companies by signing exclusive distribution contracts. → The distributor sells the product in the domestic market with the same characteristics that it had when received from the manufacturing company. This modality can also be considered direct export. → It is a license when the distributor pays a royalty to the company for granting it the right to distribute exclusively. Nestlé and the Spanish company Cobega for the exclusive distribution of Nespresso capsules through all channels in Spain, Andorra, Morocco, etc. 13 Licencing Management Contracts The operational control of a company is transferred to an independent international company that performs management functions: general management, financial administration, personnel management, etc. This is a type of contract widely used by international hotel chains, and in the provision of public services, such as solid waste collection, technical inspection of vehicles or infrastructure management (highways, airports, etc.). Manufacturing contracts ○ The licensor authorizes the licensee to manufacture and market the product under the former's trademark as long as certain quality and design requirements are met. ○ The control exercised is less because the licensee can act with its own manufacturing and sales know-how. ○ Sometimes, this modality is used to test the potential of the target market and the acceptance of the company's products in it. ○ Example: Real Madrid with Adidas for the exploitation of the brand will bring the club 140 million euros annually for 10 seasons. 14 Licencing Franchises Special type of agreement for retail distribution. → The franchising firm provides the franchisee with a whole series of accessory services: advertising, training, advice. Different formulas can be chosen. Some examples: ○ Develop a direct relationship with each franchisee. ○ Establish a subsidiary abroad that will be in charge of negotiating and controlling local franchisees. ○ Grant a foreign company a global franchise for the entire territory, so that this franchisee would act as a franchisor in said market. Example: McDonald's → The necessary investment to open a McDonald's franchise in Spain is 900.000€ 15 Licencing Patents This modality is the one that offers the greatest freedom to the licensee, since it only implies the possibility of using the patented right without the need for direct interference by the licensor. Null or little association between both companies, so the performance of the activities by the licensee does not pose a real threat to the reputation or brand of the licensor. Example: Wiper-Washer 16 3. Foreign Direct Investment Most important method to face foreign markets → the company is committing its own resources abroad. The riskiest option and the most profitable in the long term. There are many forms of direct investment → Key: find the form that best adapts to the peculiarities and objectives of each particular investment operation. To consider: ○ Decide whether you will invest solely with your own resources or share the investment and risk with other companies. ○ Decide if said investment will be made in an existing firm in the foreign country (acquisition) or if it will involve the creation of a new subsidiary. Product more adapted to the demand of different markets and provide better service. It can help reduce costs or strengthen the company's competitive capacity by being able to opt for new resources not available in the country of origin (technology, human resources, etc.). 17 Foreign Direct Investment Shared investment: joint ventures “Association between two or more economic entities to develop a business, normally long-term, in which control and decision-making, benefits and risk are shared based on the proportional contribution of each of the parties.” (Harrigan, 1985) Each of the partners can contribute assets of a different nature to the joint venture: money, physical assets, human resources, know-how, distribution networks, technology, etc. Generally, neither partner is allowed to have a dominant position over the other (Example: 50%-50%). Cases: ○ Local Joint venture → Objectives: penetration into said market, facilitated by the knowledge of the local partner, or the exploitation of a series of resources located in said market to which only local companies have access. ○ Global Joint ventures or global alliances → are much more complex. Not so obvious objectives. Exchange of intangible assets and know-how. They are developed between competing companies where the learning or know-how obtained can be used by a partner outside the alliance for its own benefit. 18 Foreign Direct Investment Acquisition The acquisition involves the purchase of the capital of an already established company with the aim of obtaining control of it → the resulting company after the acquisition uses the assets of the acquired local company and combines them with the resources of the investing company. Total or partial acquisition. Acquisitions allow rapid entry into a market, a rapid return on the investment made and easy access to local market knowledge and resources. By purchasing a local company you also avoid many of the cultural, legal and managerial obstacles necessary to initially enter a market. It also allows us to assume strategic assets related to consolidated brands, distribution networks or R&D infrastructures. Example: AB InBev (Bélgica) acquires Corona (México) 19 Foreign Direct Investment Wholly-Owned Subsidiaries The company may decide to enter a market with its own means, creating a sales and/or production subsidiary. Objective: Exploit specific advantages that are difficult to transfer to other companies. High commitment of resources, slower development (carry out the project, build, recruit staff, register the company, etc.) and a higher risk than entry through joint ventures or acquisitions. Many local governments encourage the creation of new subsidiaries through incentives: ○ MNCs generate greater employment in the local market. ○ They favor the innovation processes of their local companies by increasing competition. Example: Inditex 20 Summary 21 Starbucks market entry strategy* Starbucks employs three strategies: wholly-owned subsidiaries, joint ventures, and licensing. The wholly-owned subsidiaries strategy is carried out when the company has extensive knowledge of the market, such as that in the US or Canada. Joint ventures come in handy when Starbucks wants to initiate business in a new market. Finally, the licensing strategy allows the coffee chain to quickly expand in a specific country. The Asia Pacific has always been a fruitful market for Starbucks due to the increasing young population who are eager to adopt a Western lifestyle: In Japan, Starbucks set up a joint venture with Sazaby League Ltd - a local designer and retailer of handbags, clothing and accessories which also operates restaurants and coffee shops under the name Afternoon Tea. The partnership starting in 1995 has allowed Starbucks to win over Japan, making it one of the company's top-performing markets internationally. Since 2014, the company has taken full control of a Japanese Subsidiary for $ 914M. In China, Starbucks made its debut under a licensing agreement with Beijing Mei Da Coffee Co. Ltd in 1998. In the following years, the company expanded its influence by forming joint ventures with Uni-President Group and Mei-Xin International Ltd to operate in Shanghai, Hong Kong, Shenzhen, Macau, and other parts of southern China. *Source: https://www.studysmarter.co.uk/explanations/business-studies/business-case-studies/starbucks-international-strategy/ 22 Contents 1. Entry strategies and the influential factors when selecting them 2. Models to assess and select the entry mode and strategy 23 2. Models to assess and select the entry mode and strategy Sequential or Progressive internationalization process from Johanson & Valhne (1977) Uppsala University School 24 2. Models to assess and select the entry mode and strategy The Paradigm OLI from Dunning (1979) - Eclectic Paradigm It assumes that companies will avoid transactions in the open market if the cost of completing the same actions internally, or in-house, carries a lower price. The OLI model allows to assess and explain the stages of the international production model. 2. Models to assess and select the entry mode and strategy OLI from Dunning (1979) - Eclectic Paradigm FDI in the first quarter of 2023 July 2023 update: Preliminary estimates in Q1 2023 show global FDI flows tripled from very low levels recorded in Q4 2022, reaching USD 440 billion. On a year-on-year basis, global FDI flows remained 25% below the level recorded in Q1 2022. Source: OECD International Direct Investment Statistics database [USD bn]