Country evaluation, selection & Foreign market entry strategies GEETA SHIROMANI ASSOCIATE PROFESSOR
Basic foreign expansion entry decisions A firm contemplating foreign expansion must make three decisions Which markets to enter?? When to enter these markets?? What is the scale of entry?? Which is the best mode of entry??
Basic Market Entry Decision- Which Market?? 200 nation-states Different long-run profit potential for firms Size of market Purchasing power (present wealth) Future wealth Benefits cost & risks trade off– rank markets Future economic growth rates Free market system & country’s capacity for growth Stable and developing markets without upsurge in inflation rates or private-sector debt
Basic Market Entry Decision- Which Market?? Value an international business can create in a market Suitability of product for market Nature of indigenous competition Not widely available & satisfies an unmet need Greater value translates into an ability to charge higher prices & build sales volume more rapidly
Basic Market Entry Decision- Which Market??Process of country evaluation & selection Scan for alternatives Choose & weight variables Collect & analyze data for variables Use tools to compare variables & narrow alternatives Make final country Selection
Basic Market Entry Decision – Timing of Entry?? Early entry - Firm enters foreign market before other foreign firms First mover advantage Ability to preempt rivals & capture demand by establishing strong brand name Build sales volume and ride down the experience curve with a cost advantage Create switching cost that tie customers into products & services
Basic Market Entry Decision – Timing of Entry?? First mover disadvantages - Pioneering costs Time & effort in learning the rules of the game Mistakes due to ignorance Liability of being a foreigner Costs of promoting & establishing a product – educating customers (KFC in China -> benefit to McDonald’s)
Scale of Entry?? Large scale entry Requires commitment of significant resources & implies rapid entry (Dutch ING spend billions to acquire US operations) Strategic commitment Decision that has long term impact & is difficult to reverse (entering market on large scale) Change the competitive playing field & unleash number of changes – e.g. how competitors might react Can limit strategic flexibility
Scale of Entry?? Small Scale Entry: Advantages: Time to learn about the market. Limits company exposure. Disadvantages: May be difficult to build market share. Difficult to capture first-mover
Basic market entry decisions Discussion based on developing country considerations Can use MNEs to learn & bench mark against Can focus on niches the MNE ignores or can’t serve Can piggyback with MNEs (eg; Jollibee)
Which Foreign market entry mode?
EXPORTING The commercial activity of selling and shipping goods to a foreign country The most common overseas entry approach for small firms
EXPORTING Exporting can be either direct or indirect In direct exporting the company sells to a customer in another country In contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product
EXPORTING The Internet is becoming increasingly important as a foreign market entry method Initially, Internet marketing focused on domestic sales, however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of: international Internet marketing (IIM).
Exporting.. Advantages: Easy implementation of strategy Less investment abroad which helps small firms also to enter international business Minimal risks Casual international marketing effort Firm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips)
Exporting.. Disadvantages: Susceptibility to trade barriers Logistical difficulties Less suitable for service products Susceptibility to exchange-rate fluctuation Not appropriate if other lower cost manufacturing locations exist High transport costs can make exporting uneconomical especially bulk products
CONTRACTUAL AGREEMENTS Contractual agreementsare long-term, non-equity associations between a company and another in a foreign market Approaches: Licensing Franchising Contract manufacturing Management contracting Turnkey projects
LICENSING An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return, the licensor receives a royalty fee from the licensee. Offers know-how, shares technology, and shares brand name with licensee; licensee pays royalties; lower-risk entry mode; permits access to markets
Licensing.. Advantages: Helps company to spread out its R&D & investment costs with incremental income Little additional capital or time investment Legitimate means of capitalizing on intellectual property in a foreign market. Receive royalties for granting the rights to intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks)
Licensing.. Advantages: Allows firm to participate where there are barriers to investment (Fuji-Xerox) Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing) Primarily used by manufacturing firms
Licensing.. Disadvantages: Inconsistent product quality may effect product image negatively The agreement generally prohibits the originating firm from exploiting the assets in particular foreign markets Does not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economies Firms can lose control over the competitive advantage of their technological know-how. Solution: Cross licensing agreements
FRANCHISING Franchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business Longer-term commitments
Franchising.. Advantages: Important way of gaining foreign returns on certain kinds of customer-service and trade name assets Limited financial commitment Involves longer term commitment than licensing. Primarily used by service firms (McDonalds)
Franchising.. Advantages: Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain) Royalty payments that are some percentage of franchisee’s revenues Firm relieved of many costs & risks of opening new market.
Franchising.. Disadvantages: No manufacturing so no location economies & experience curve May inhibit the ability to take profits out of one country to support competitive attacks in another Risk of worldwide reputation if no quality control Firm can set up “master franchise” in each country – subsidiary which is JV (McDonalds & local firm)
TURNKEY PROJECTS A product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')". The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
Turnkey project.. Advantages: A way of earning great economic returns from the know-how & exporting process technology This strategy is useful where FDI is limited by host government regulations Less risky than FDI in countries with unstable political and economic environment Means of exporting process technology (chemical, pharmaceutical, petroleum, mining)
Turnkey project.. Disadvantages: Firm has no long term interest in the country – can take minority equity interest in company Firm may inadvertently create a competitor (middle east oil refineries) If firm’s process technology is a source of competitive advantage, then selling technology is also selling competitive advantage to potential competitors
Contract manufacturing Contract manufacturing is a process that establish a working agreement between two companies. As part of the agreement, one company will custom produce parts or other materials on behalf of their client.
Contract manufacturing Advantages: The client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods so less capital investment is required Helps to achieve benefits of economies of scale Helps to achieve location economies
Contract manufacturing Disadvantages: Less management control Potential security or confidentiality issues Complexity Potential quality issues
Management contracting A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.
Management contracting Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.
Management contracting Advantages: Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company when foreign government actions restrict other entry methods.
Management contracting Disadvantages: Loss of control Time delays Loss of flexibility Loss of quality Compliance
STRATEGIC ALLIANCE Cooperative agreements between potential or actual competitors A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective SIAs are sought as a way to shore up weaknesses and increase competitive strengths. Licensing, Joint venture, consortia etc
Strategic alliances Firms enter 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 Access to additional sources of products and capital
Strategic alliances- JOINT VENTURES A JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.
JOINT VENTURE Four Characteristics define joint ventures: JVs are established, separate, legal entities The acknowledged intent by the partners to share in the management of the JV There are partnerships between legally incorporated entities such as companies, chartered organizations, or governments, and not between individuals Equity positions are held by each of the partners
Strategic alliances- Consortia Consortia are similar to joint ventures and could be classified as such except for two unique characteristics: They typically involve a large number of participants They frequently operate in a country or market in which none of the participants is currently active. Consortia are developed to pool financial and managerial resources and to lessen risks.
Joint ventures.. Advantages: Smaller investment Local marketing and production/ procurement of expertise from local partner Better understanding of the host country Typically 50/50 with contributed team of managers to share operating control
Joint ventures.. Advantages: Firm benefits from local partner’s knowledge of competitive conditions, culture, language, political system & business system Sharing market development costs & risks with local partner In some countries, political considerations make JVs the only feasible entry mode
Joint ventures.. Disadvantages: Risk of giving control of technology to the partners Shared ownership arrangement can lead to conflicts and battles of control between the investing firms.
Structuring the alliance to reduce opportunism
WHOLLY OWNED SUBSIDIARY The firm owns 100% of the stock The firm can either set up a Green-field venture or It can acquire an established firm in the host nation
Wholly owned subsidiary Advantages: Reduces the risk of loosing control over technological competence Tight control over operations Helps to achieve location economies
Wholly owned subsidiary.. Disadvantages: Larger commitment and risk Most costly method Risk of national expropriation
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) Pressure for Cost Reduction Combination of exporting and wholly owned subsidiary