Foreign Market Entry

One of the most important decisions in IB

is the mode of entering foreign market.
Important foreign market entry strategies
are as follows:

Exporting
Licensing/Franchising
Contract manufacturing
Management contract
Assembly operations
Fully owned manufacturing process
Joint ventures
Countertrade
Mergers and acquisitions
Strategic Alliances
Third country location

 Exporting

The most traditional mode of entering

international markets
Exporting is the appropriate strategy when
one or more of the following conditions
prevail
The volume of foreign business is not large
enough to justify production in the foreign
market.
Cost of production is high
There are political or other risks of
investment in that country

 The market may not big enough in

the long term
Exporting is attractive when the
concerned company has excess
capacity.
Also exports ensure that the
company has other markets to cater
when faced with stiff competition in
home market or when home market
reaches saturation levels.

 The two ways of exporting are

Indirect exporting
Direct exporting
Direct exporting : refers to the sale in
the foreign market directly by
the manufacturer. The sale is directly
to the foreign customer or
through a middleman located in the
foreign market.

 A number of organizational
arrangements are available to a
company for carrying on direct
export.
1)Export department
2)overseas sales branches
3) establishing contacts with foreign
based distributors or agents

Indirect export : Here the company transfers the responsibility

of the selling job to some other organization .

Advantages :
Firm doesnot have to build up an international infrastructure.
The risk involved is very less
Ideal for companies starting exporting for the first time
Also ideal for small sized companies

Disadvantages
The development of overseas market depends to a very large
extent
on the middlemen and not on the firm producing the export
goods.

The two alternative channels available for IE are

1) International Marketing middlemen:
There are two important middlemen- merchants and
agents. The basic distinction between the merchant and
the agent is that the merchant takes title to the product
he sells , while the agent does not.

Export merchants: The domestic based export merchant

buys the
manufacturers product and sells it abroad on his own.

Export/trading houses: They buy from domestic

manufacturers and export abroad.

 Trading companies:they are into exports

and imports for e.g Mitsubishi
Agents /brokers
2) co-operative organizations:
Piggyback marketing : (allied company
arrangement or mother henning) one
manufacturer uses its overseas distribution
facilities to sell the products of one or
more companies including its own

Licensing and Franchising:

The licensor issues a license to
a foreign company to use
manufacturing process,
trademark, patent, trade secret
or other item of value for a fee
or royalty. The licensor gains
entry at little risk, the licensee
gains production expertise.

 Disadvantages: The licensor has less

control over the licensee than it does over
its own production and sales facilities.
If the licensee is very successful, it has
given up profits.
Also when the contract ends, it could
result in creation of a competitor.
To avoid this licensor usually supplies
some proprietary ingredients or
components needed in the product (as
coca-cola does)

 A number of foreign companies have entered the

Indian market by licensing.
IFB washing machine was manufactured under
license from Bosch of Germany.
Nike International ltd entered India by licensing to
Sierra Industrial Enterprises. The licensee would
take care of quality control, marketing and
distribution operation and would pay Nike 5%
royalty on ex-factory price on both footwear and
apparel.
Arvind Mills owns Indian marketing rights for
leading US brands like Arrow, Lee and Wrangler.

 BAT (British American Tobacco

Company) has given licenses in many
countries for the manufacture of their
brand 555.
In India ITC is the licensed producer
of 555
Pepsi granted license to Heineken of
Holland giving them the exclusive
right to produce and sell Pepsi in
Holland.

 Franchising is a more complete form

of licensing.
The franchiser offers a complete
brand concept and operating system.
The franchiser also supports in terms
of training of employees, quality
assurance and advertising.
The franchisee invests the money and
pays certain fees to the franchiser.

 McDonalds has entered many

countries by franchising their retail
concepts and making sure that their
marketing is culturally relevant.e.g
In Holland they serve burgers with
beer.
In India they cater to vegetarian
tastes- McAloo Tikki and McPuff.
Other examples are Dairy Queen,
Dominos Pizza and KFC.

 NIIT and Aptech (SSI) have

franchisees in Africa, South
east Asia dn Middle east
countries.
Hotel chains like Hilton also
operate the franchise way.

Contract Manufacturing
Under contract manufacturing a company doing
international marketing contract with firms in
foreign countries to manufacture or assemble the
products while retaining the responsibility of
marketing the product. This is a common practice
in IB.
There are a number of multinationals which employ
this strategy in India.
E.g. Park Davis, HLL, Ponds.
Samsung when it first entered India used Videocon
facilities for manufacturing their products. The
marketing was done by Samsung personnel.

 Advantages:
1) The company doesnt have to
commit resource for setting up
production facilities.
2) It frees the company from the risks
of investing in foreign markets.
3) If idle production capacity is
readily available in foreign country, it
enables the marketer to get started
immediately.

 4) In many cases the cost of the product

obtained by contract manufacturing is lower
than if it were manufactured by the
international firm.
5) Its a less risky way to start by CM. If the
business doesnot pick up sufficiently,
dropping it is easy. But when you have your
own production facility , the exit is difficult.
e.g For many years Godrej Soaps
manufactured Dettol for Reckitt and Coleman,
Johnsons Baby soap for J& J and Ponds
Dreamflower and Cold cream for Ponds (HLL)

 Disadvantages
Less control on manufacturing so
quality could get compromised.
Big risk of developing potential
competitors
Loss of potential profits as the
value chain is not completely
exploited.

Management
Contracting
The firm provides the management knowhow and may or may not have an equity
stake in the enterprise being managed.
MC is a low risk method of getting into
foreign market and it starts yielding
returns right from the beginning.
The arrangement is even more attractive if
the contracting firm is given an option to
purchase some shares in the managed
company within the stated period.

 E.g. Tata Tea, Harrison Malayalam etc have

contracts to manage a number of
plantations in Sri Lanka
Turnkey contracts
TC are common in IB in the supply, erection
and commissioning of plants as in the case
of oil refineries, steel mills, cement etc.
turnkey operation is an agreement by a
seller to a buyer with a facility fully
equipped and ready to be operated by the
buyers personnel, who will be trained by
the seller.

Fully owned
manufacturing facilities

Companies with long term and substantial interest in the foreign

market establish fully owned manufacturing facilities.

Advantages:
It provides the firm with complete control over production and
quality
It doesnot have the risk of developing potential competitors as
in the case of licensing and contract manufacturing.

Disadvantages
Cost of production could be higher in the foreign market.
There could be supply related problems like shortage of skilled
manpower, reaw materials
There could be union related or political problems.

Assembly operations:
In this concept , the company ships
the parts to the foreign country and
only assembles the product there
(taking advantage of the labour
cost).
The final product could be sold in
the foreign country and/or also taken
back to the home country.

Joint Ventures
Any form of association which implies collaboration for
more than a transitory period is a JV. Such a broad
definition encompasses many diverse types of joint
overseas operations
Sharing of ownership and management in an
enterprise
Licensing/franchising agreements
Contract manufacturing
Management contracts
As per most experts JV encompasses joint ownership
venture .

Joint Ventures
The essential feature of a joint
ownership venture is that the
ownership and management are shared
between a foreign firm and a local firm.
In some cases more than two parties
are involved. For e.g Pepsis Indian joint
venture involved Voltas and Punjab
Agro Industries Corporation.
other e.g in India are
Maruti Suzuki and Hero Honda.

Strategic Alliances
There are different types of alliances according to
purpose or structure
Alliances as per purpose are as follows
Technology development alliances like research
consortia , simultaneous engineering agreements
Marketing, sales and service alliances in which
a company makes use of the marketing
infrastructure of another company in the foreign
market for its products.

 Multiple activity alliance which

involves the combining of two or
more types of alliances.
While marketing alliances are often
single country alliances ,as
international firms take on different
allies in each country , technology
development and operations
alliances are usually multicountry
since these kinds of activities can
be employed over several countries.

Strategic Alliances

Strategic alliances as per structure are

Equity based (Joint venture) and b) Non-equity based.

Non equity based alliances such as technology transfer

agreements
, licensing agreements, marketing agreements are proving to be
more dynamic more constructive and more strategic.

e.g The Star Alliance brings together 16 airlines

Lufthansa,United
Airlines, Mexicana, Air Canada, ANA, Austrian Airlines, British
Midland, Singapore Airlines, Tyrolean,Lauda,SAS,Thai Airways,
Varig, Air NewZeland, Asiana Airlines and Spainair-into a huge
global partnership that allows travelers to make nearly seamless
connection to about 700 destinations.

Strategic Alliances

Many strategic alliances take the form of marketing alliances .

These fall into three major categories

Promotional Alliances : One company agrees to carry a promotion

for another companys products or service.
McDonalds for e.g has often teamed up with Disney to offer
products related to current Disney films as part of its meals for
children.

Logistics Alliances : One company offers logistical services for

another companys product.
For e.g Abbott laboratories warehouses and delivers all of 3Ms
medical and surgical products to hospitals across the US.

Pricing Alliances: One or more companies join in a special pricing

collaboration.
Hotel and rental car companies often offer mutual price discounts.

Countertrade:
is a form of international trade in
which certain export and import
transactions are directly linked with
each other and in which import of
goods are paid for by exports of
goods , instead of money payments.
Countertrade takes several forms.
The following are the most common
among them.

 Barter : In this system , goods and

services are mutually exchanged between
two countries depending upon their
bargaining strength
For e.g a countertrade deal between the
MMTC and a Yugoslavian company involved
import of 50,000 tonnes of rails of the
value of about $38 million by the MMTC
and the purchase by the Yugoslavian
company of iron ore concentrates and
pellets of the same value.

 Russia supplied newsprint and

crude oil to India and India in
turn supplied tea, garments,
medicines to Russia.

Countertrade:

Compensation deal : Under this arrangement , the seller

receives a part of the payment in cash and the rest in
products.
Counterpurchase: Under the counterpurhcase
agreement the seller receives the full payment in cash
but agrees to spend an equivalent amount of money in
that country within a speicified period.
e.g Pepsicolas trade with erstwhile USSR Pepsi got
paid in roubles for the sale of its concentrates in the
USSR , but spent the amount for purchase of Russian
products like Vodka and wine.

 Daimler-Benz sold 30 trucks to Romania.

From Romania in exchange it got 150
jeeps.These jeeps were sold in Ecuador in
exchange for bananas. The bananas were
brought back by Benz into West Germany
which was sold to a supermarket chain
which finally paid them in Deutsch Marks.
In early 1980s , Boeing exchanged 10 747s
for 34 million barrels of Crude oil