Modes Of Entry

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Modes Of Entry

  1. 1. MODES OF ENTRY
  2. 2. INTERNATIONAL BUSINESS ANALYSIS <ul><li>FOREIGN MARKET ANALYSIS : </li></ul><ul><li>The firms have alternative foreign markets to enter. In order to achieve these goals successfully, the firm have to: </li></ul><ul><li>Analyse Alternative foreign markets- </li></ul><ul><ul><li>Current & potential size of alternative markets </li></ul></ul><ul><ul><li>Level of competition </li></ul></ul><ul><ul><li>Legal and Political environment </li></ul></ul><ul><ul><li>Socio-cultural environment </li></ul></ul><ul><ul><li>GDP and Per Capita </li></ul></ul><ul><ul><li>Purchasing power </li></ul></ul><ul><ul><li>Urban areas/Rural areas </li></ul></ul>
  3. 3. <ul><li>Assessing Costs, Benefits and Risks- </li></ul><ul><li>Cost: consider Direct cost and Opportunity cost </li></ul><ul><li>Direct cost - co incurs in entering and setting up of operations in the global market. </li></ul><ul><li>Opportunity cost - is the profits that the co would have earned by entering the alternative market. </li></ul><ul><li>Benefits: </li></ul><ul><li>Risks: exchange rate fluctuation, operating complexity, direct financial loss, Government seizure the property. </li></ul>
  4. 4. MOTIVATIONS FOR INTERNATIONAL EXPANSION : <ul><li>PROACTIVE (pulled by good foreign markets) </li></ul><ul><ul><li>Firm specific advantage </li></ul></ul><ul><ul><li>Resource availability </li></ul></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Economic and political factors </li></ul></ul><ul><li>REACTIVE (pushed by bad domestic markets) </li></ul><ul><ul><li>Domestic competition </li></ul></ul><ul><ul><li>Poor domestic market </li></ul></ul><ul><ul><li>Follow customers </li></ul></ul>
  5. 5. CHOOSING A MODE OF ENTRY: (DUNNING’S ECLECTIC THEORY) <ul><li>Ownership advantages </li></ul><ul><li>Location advantages </li></ul><ul><li>Internalization advantages </li></ul>
  6. 6. OTHER FACTORS AFFECTING MODE OF ENTRY <ul><li>Need for control (desire to reduce uncertainty and maintain full control over the foreign operation) </li></ul><ul><li>Resource availability (lack of access to financial capital may mean that entry by ownership is impossible so that non-equity or partial equity modes are preferable; most likely for small firms) </li></ul><ul><li>Global strategy (global integration vs. national responsiveness; if the former, more likely to use ownership routes since EOS and scope & synergies are better achieved through internal market/hierarchy) </li></ul>
  7. 7. <ul><li>external licensing equity joint wholly owned </li></ul><ul><li>market venture subsidiary </li></ul><ul><li>__________________________________________ </li></ul><ul><li>low control <---------------------------> high control </li></ul><ul><li>low resource cost high resource cost </li></ul>
  8. 8. EXPORTING: <ul><ul><ul><li>INDIRECT EXPORTING: is exporting the products either in their original form or ion the modified form to a foreign country through another domestic country. </li></ul></ul></ul><ul><ul><ul><li>DIRECT EXPORTING: is selling the products in a foreign country directly through its distribution arrangement or through a host country’s company. </li></ul></ul></ul><ul><ul><ul><li>INTRACORPORATE TRANSFER: are selling of products by a company to its affiliation company in host country (or another country). E.g. HLL in India to UNILEVER in USA </li></ul></ul></ul>
  9. 9. Advantages of Exporting as Mode of Entry <ul><ul><li>low financial cost (but have start up costs) </li></ul></ul><ul><ul><li>risk limited to value of exports </li></ul></ul><ul><ul><li>can enter foreign market gradually (ease of start up, less chance of mistakes, gain experience) </li></ul></ul><ul><ul><li>gain information about and expertise in foreign market </li></ul></ul><ul><ul><li>export success breeds more export success </li></ul></ul>
  10. 10. Disadvantages of Exporting <ul><ul><li>Difficulty in identifying customer needs </li></ul></ul><ul><ul><li>Potential problems with local distributors </li></ul></ul><ul><ul><li>Selecting the local distributor, how to split the profits with the local firm, differences in motivation, and time horizon </li></ul></ul><ul><ul><li>Logistical considerations (costs of warehousing, transport, distribution, longer supply lines, difficulties in communication) </li></ul></ul>
  11. 11. LICENSING : <ul><li>The advantage of licensing is that the company does not have to bear the development costs and risks associated with opening up a foreign market. Also, licensing may be an attractive option for companies that are unwilling to commit financial resources to an unfamiliar or politically volatile foreign market. </li></ul>
  12. 12. Cross-Licensing Agreement <ul><li>A firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm. Such agreements are designed to reduce the risks associated with licensing technological know-how, since the licensee realizes that if it violates the spirit of a licensing contract (by using the knowledge obtained to compete directly with the licensor), the licensor can do the same to it. </li></ul>
  13. 13. <ul><li>Advantages </li></ul><ul><ul><li>low financial cost and risks </li></ul></ul><ul><ul><li>can learn about foreign market potential </li></ul></ul><ul><ul><li>access to foreign markets </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>foreign market access is constrained by contract </li></ul></ul><ul><ul><li>licensee may not perform up to expectations </li></ul></ul><ul><ul><li>may be creating a future competitor </li></ul></ul>
  14. 14. FRANCHISING: <ul><li>When franchising, the company sells limited rights to franchisees to use its brand name in return for a lump sum payment and a share of the franchisee’s profits. However, in contrast to most licensing agreements, the franchisee has to agree to abide by strict rules as to how it does business. Whereas licensing is a strategy pursued primarily by manufacturing companies, franchising is a strategy employed chiefly by service companies. </li></ul>
  15. 15. <ul><li>Advantages of Franchising: </li></ul><ul><ul><li>expand into foreign markets with low risk and low cost </li></ul></ul><ul><ul><li>more control than under licensing or exporting with distributor </li></ul></ul><ul><ul><li>obtain key information about the foreign market more easily than under licensing/exports </li></ul></ul><ul><ul><li>lessons learned can be applied at home </li></ul></ul><ul><li>Disadvantages of Franchising: </li></ul><ul><ul><li>must share profits with franchisee </li></ul></ul><ul><ul><li>probable greater financial commitment than under licensing or exports </li></ul></ul><ul><ul><li>more complicated (more responsibilities, greater commitment to foreign firm) than licensing or exports) </li></ul></ul><ul><ul><li>do not have tight control over foreign partner (but better than under licensing or exports through distributor) </li></ul></ul><ul><ul><li>quality control ( franchisees concerned is less than franchiser) </li></ul></ul>
  16. 16. FOREIGN DIRECT INVESTMENT <ul><li>Foreign Direct Investment (FDI): </li></ul><ul><ul><li>Acquisition of foreign assets for the purpose of control. US FDI = “ownership or control of 10%+ of an enterprise’s voting securities…”. </li></ul></ul><ul><li>Methods for FDI: </li></ul><ul><ul><li>Greenfield entry (start from scratch, with clean slate) </li></ul></ul><ul><ul><li>Brownfield entry (acquisition of existing firm) </li></ul></ul><ul><ul><li>Joint venture (go with a partner) </li></ul></ul>
  17. 17. <ul><li>Advantages of FDI as Mode of Entry: </li></ul><ul><ul><li>provides more control over foreign operations </li></ul></ul><ul><ul><li>offers better protection for the firm’s FSAs </li></ul></ul><ul><ul><li>better understanding of host market, easier and quicker to adapt products for market and respond to market changes </li></ul></ul><ul><li>Disadvantages of FDI: </li></ul><ul><ul><li>high cost route (financial & personnel commitment) </li></ul></ul><ul><ul><li>more exposure to economic and political risks </li></ul></ul><ul><ul><li>problems of managing the subsidiary at a distance </li></ul></ul>
  18. 18. JOINT VENTURES : <ul><li>Advantages: </li></ul><ul><li>Multinational may feel that it can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political systems, and business systems. </li></ul><ul><li>Company can share the costs and risk of setting up business with a local partner; and in many countries political considerations make joint ventures the only feasible entry mode. </li></ul><ul><li>Drawbacks: </li></ul><ul><li>As the case of licensing, a company that enters into a joint venture runs the risk of losing control over its technology to its venture partner. </li></ul><ul><li>Joint venture does not give a company the tight control over different subsidiaries that it might need if it wishes to pursue a global strategy. </li></ul>
  19. 19. WHOLLY OWNED SUBSIDIES: <ul><li>A wholly owned subsidiary is the most costly method of serving a foreign market. Companies taking this approach have to bear the full costs and risks associated with setting up overseas operations. </li></ul><ul><li>Advantages </li></ul><ul><li>When a company’s competitive advantage is based on control over a technological competency, a wholly owned subsidiary will normally be the preferred entry mode, since it reduces the risk of losing control over that competency. </li></ul><ul><li>wholly owned subsidiary gives a company the kind of tight control over operations in different countries that is necessary for pursuing a global strategy </li></ul>
  20. 20. Global Strategic Alliances <ul><li>Strategic alliances are cooperative agreements between companies that may also be competitors. In this section, we are concerned specifically with strategic alliances between companies from different countries. Strategic alliances run the range from formal joint ventures, where two or more companies have an equity stake, to short-term contractual agreements between two companies to cooperate on a particular problem. </li></ul>
  21. 21. Advantages of strategic alliances <ul><li>Companies enter into strategic alliances with actual or potential competitors in order to achieve certain strategic objectives. </li></ul><ul><li>Strategic alliances may facilitate entry into a foreign market. </li></ul><ul><li>Many companies have entered into strategic alliances in order to share the fixed costs (and associated risks) that arise from the development of new products or processes. </li></ul><ul><li>Alliances may be a way of bringing together complementary skills and assets that neither company could easily develop on its own. </li></ul><ul><li>Alliances may be useful if they help a company set technological standards for its industry and if those standards benefit the company. </li></ul>
  22. 22. Disadvantages of Strategic Alliances <ul><li>Commentators have criticized strategic alliances on the grounds that they give competitors a low-cost route to gaining new technology and market access. Unless it is careful, a company can give away more than it gets in return. This raises the question, why do some alliances benefit a company, while others can end up with the firm giving away technology and market access and getting very little in return? </li></ul>
  23. 23. SPECIALIZED ENTRY MODES <ul><li>Management Contract: </li></ul><ul><ul><li>One firm provides managerial assistance, technical advice or specialized services to another firm for an agreed time period in return for a fee (flat fee or percent of revenues). </li></ul></ul><ul><li>Turnkey Project: </li></ul><ul><ul><li>One firm (or firms) agrees to fully design, construct and equip a facility and then “turn the key” over to the purchaser when the plant is ready for operation. May be a fixed price or a cost plus contract. Often done with large construction projects in developing countries. </li></ul></ul>

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