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Understanding Non-Equity Modes of Market Entry
- 2. PURPOSES Understand different non-equity entry modes How NEMs contribute to competitive advantage of the company and consider drawbacks that may arise.
- 3. NON-EQUITY MODES OF ENTRY • Defined as modes that do not entail equity investment by a foreign entrant, • Becoming increasingly popular among service firms for organizing overseas ventures/operations • Has low degree of ownership and Control and extent of investment. • Less risk than equity entry modes.
- 4. LICENSING • Involves a contractual arrangement whereby a company licenses the rights to certain technological know-how, design, patents, trademarks and intellectual property to a foreign company • A common method of for companies with a distinctive and legally protected asset, • Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation. • Licensee will pay a free which could be a % royalty of sales (normally less than 5%) and a fixed fee.
- 5. COCA-COLA Biggest soft drink company in the world Has 3000 products and operations in 200 countries.
- 6. MERIT • Brand awareness: Coca Cola senior managers view licensing as a powerful marketing term. Coca-Cola is the most recognised word and recognised by 94% of the world’s population. • •Gained an additional revenue opportunity • •Strengthened their core messaging of • sustainability • •Provided increased exposure for the brand
- 7. DEMERIT • Difficult to use legal redress with business partners to disagreements upon implementation. • Revealing secret • Hard to monitor partners in foreign market
- 8. FRANCHISING • A franchise is an ongoing business relationship where one party ('the franchisor') grants to another ('the franchisee') the right to distribute goods or services using the franchisor’s brand and system in exchange for a fee. • The Franchisor will retain the intellectual property rights to the recipes, formulas, ways of working or operating the businesses and grant the rights to operate and sell their products or services and brand usage rights to the franchisee in exchange for ‘key money’ • Franchise contractual market entry modes are commonly used in the quick serve restaurant industry
- 9. MCDONALD’S • McDonald's has over 30000 restaurants in the world, operating in over 100 countries. • 80% of restaurants are franchised • McDonalds is often "considered the gold standard of franchising".
- 10. MERIT • Increase Revenue: McDonald’s earns a substantial up-front fee and regular royalty payments from each franchise: • Restaurants typically cost between £150,000 and £400,000 to buy. Monthly rent on the premises based on sales and profitability (usually between 10% and 18%). Service fees for the use of McDonald’s system – 5% Franchised sales was $67.65 billion compared with $18.29 billion (operated restaurants) => McDonald’s keeps being a profitable business with positive cash flow, which can be used to support for its core activities, grow and expand larger in the future.
- 11. MERIT • Leverage the brand: By acquiring new franchise outlets, McDonalds was able to get in touch with a wider target market and reach more consumers globally, this in the long-run helped it achieve and maintain a high market share in the fast-food industry and it also enhanced the company's corporate
- 12. DEMERIT • Regulations and Legal Requirement: In order for McDonald’s to franchise the company must comply with substantial government regulations and legal restrictions. • Extensive Preparations: McDonald’s should prepare to setup and train their franchisee. • Prepare a thorough and detailed operation manual and provide technical, marketing, and other form of support throughout their franchise agreement. These are all time consuming.
- 13. CONTRACT MANUFACTURING • One company arranges for another company in a different country to manufacture its products. • As known as ‘International subcontracting’ or ‘international outsourcing’ • The company provides with the manufacturer with specifications, (materials required if applicable) • Many industries use this process, especially the aerospace, defence, computer, energy, medical, food manufacturing,, … • Some types include machining, complex assemble, gears, grinding, …
- 14. CONTRACT MANUFACTURING (CONTD) • Globalization of business technologies and increasing pressure on international firms to be globally competitive in costs, products offering, speed in bring new products Driving force of contract manufacturing • Economic development of a number of countries depend on contract manufacturing like China, Indonesia, Mexico, Taiwan, etc. • It enables the firm to develop and control R&D, marketing, distribution, while handling over responsibility for the production to a local firm
- 15. IKEA • Operating in 41 countries, IKEA is a global destination store for home furnishing, appliances, ready-to-assemble furniture, home accessories and kitchen products • While most of the designs of IKEA products are made in Sweden, manufacturing has been outsourced to China and other Asian countries. IKEA outsources most of its products.
- 16. MERIT • Cost advantage : Most of IKEA’ manufacturing partner are based in a country with low cost labour (China, India… ). They specialize in specific types of product Having high volume production lines => lower unit cost Do not need to invest expensive capital in equipment and hiring skilled labour Contribute to cost efficiency and cost leadership strategy of IKEA Keep its products price 30-50% lower than competitors. • Operational Advantage : IKEA maximise production through their available capacity.
- 17. DEMERIT • Control over manufacturing quality is difficult Quality may be insistent • Revealing the company’s secret: Contractor may become future competitor Ex: Apple Inc. Most of their product are manufactured in China, but the key software is still be controlled and monitored in its headquarter in CA.
- 18. TURNKEY PROJECT • This is an entry mode whereby an international company is paid to design and construct a project for a client usually government in the developing country. • The contractor which is the international company agreed to offer training on the usage of the project before handing over. • Turnkey project normally happened in contraction firm, pharmaceutical, and electricity power station • It is means of gaining great economic return from technology provided to the host country. • Turnkey strategy is useful when the host government regulation limits foreign direct investment • Turnkey product has less risk as compare to foreign direct investment especially with countries with political instability as a long-term investment in such country may expose the company to unacceptable political risk.
- 19. MANHATTAN CORPORATION – MERIT • Turnkey projects have improved the financial capabilities of most companies that operate turnkey projects. • Manhattan Corporation for instance which is engaged in turnkey mining and processing equipment have obtained substantial benefits from delivering projects in Africa in Australia • In 2013 the company completed 80% 400 kW turnkey grinding mill for a chrome processing mine in Zimbabwe and received initial funding for the project. • The Zimbabwean Project offers Manhattan Corporation the opportunity to undertake investment in Zimbabwe, a country where there is a lot of restrictions on foreign direct investment. • In the same year Manhattan Corporation delivered a $22m a semi-autogenous grinding mill for Australian Copper company and this also boosted the company’s financial resources.
- 20. DEMRIT • Risk of revealing company’s secrets to rivals It should however be noted that if the international company process technology which is it competitive advantage then selling the technology after the project is done means selling your competitive advantage. • May create competitor
- 21. • Non-equity modes vary in terms of resource or commitment to foreign markets. • NEMs allow firm and reduce risk in high-risk countries, however, they only have limited control over it. • No market entry mode is appropriate in all circumstances. • Most firms will have a vast portfolio on entry modes, depending on each specific market situation.
Editor's Notes
- . Non-equity modes are especially popular among consumer-services firms (such as hotel and restaurant firms) as compared to professional-services firms (such as consulting firms) In a non-equity mode, exporting and contractual agreement are the two routes to choose from. Exporting is a way for an organization to expand its products or services into a foreign market without having to make an investment in items such as facilities within that market. There are two main exporting modes; Direct Exports and Indirect Exports. Contractual agreements are another way to expand into a foreign market without a large commitment. There are four main agreement types; Licensing/Franchising, Turnkey Projects, Research & Development Contracts, Co-marketing.
- Up to 15%. Licensing royalty rates paid for video game inventions. “The industry average for licensing is about 3 percent, but if the product has a patent, the inventor can ask for a higher royalty,
- The Coca-Cola Company uses a licensing arrangement known as a franchise system. All license holders, or franchisees, are legally independent enterprises that have concluded a bottling contract with The Coca-Cola Company (TCCC). This contract confers them the right to produce TCCC's products and to market them in a certain region. In Austria, this company is Coca-Cola Hellenic Bottling Company, SA, of which Coca-Cola HBC Austria is a member.
- Advantages for licensing are the rapid diffusion of technology or brand awareness for relatively low capital investment. Coca Cola senior managers view licensing as a powerful marketing term. As he said ‘It provides us with an opportunity to support, enhance and ultimately extend our brand messages through relevant product categories. Our goal is to provide unique and compelling products that build preference for our brands and, ultimately, inspire moments of happiness."
- Coca Cola is relying on contractual enforcement of controls and in some markets it is difficult to use legal redress with business partners to disagreements upon implementation
- The main drive behind this success and rapid expansion was the franchising strategy, which helped them easily penetrate new markets and enlarge their target markets.
- Contract manufacturing is a process that establishes a working agreement between two companies. As part of the agreement, one company custom produces parts or other materials on behalf of their client. In most cases, the manufacturer also handles the ordering and shipment processes for the client. As a result, the client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods. The basic working model used by contract manufacturers translates well into many different industries. Since the process is essentially outsourcing production to a partner that privately brands the end product, there are a number of different business ventures that can make use of this arrangement. There are many pharmaceutical contract manufacturing currently functioning today, as well as similar arrangements in food manufacturing, the creation of computer components and other forms of electronics. Even industries like personal care and hygiene products, automotive parts, and medical supplies are often created under the terms of such an agreement.
- Although IKEA household products and furniture are designed in Sweden, they are largelymanufactured in developing countries to keep costs down. China accounts for about 2½ times as much supply as Sweden. For most of its products, the final assembly is performed by the end-user (consumer).
- Cost Advantages A contract manufacturer may offer cost advantages over a company’s internal production facilities. The manufacturer may, for example, be based in a country with low labor costs. Some contract manufacturers specialize in specific types of products, setting up high-volume production lines that allow them to produce products at a low unit cost. A company can also obtain a cost advantage by outsourcing production rather than investing expensive capital in production equipment and hiring skilled labor. The Problem of Hidden Costs Although companies may gain an apparent cost advantage by using a low-cost contract manufacturer, they must also consider the additional costs of dealing with an outsourcing partner. A company using a contract manufacturer in a low-cost country, for example, may incur shipping costs that cancel out any unit cost advantages. The company may also have to appoint staff to manage and monitor the performance and quality of the contract manufacturer. Operational Advantages A company can gain significant operational advantages by using contract manufacture. If demand for products increases, for example, a company can hire additional production capacity to meet short-term demand without investing in its own facilities. Companies developing new products can use contract manufacturers to produce pilot runs for test marketing before setting up full-scale production facilities. Companies can also improve the quality or performance of their own products by outsourcing production of components they cannot manufacture with their own resources. Risk Factors in C Although there are important operational advantages, companies must also be aware of potential risks in contract manufacturing. Loss of control is a major challenge. Contract manufacturers may not be able to maintain production schedules or meet agreed quality standards, particularly in distant locations where day-to-day control is impractical. Contract manufacturers specializing in particular types of products may work for a number of companies that are competitors, increasing the risk of losing sensitive commercial or technical information.