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Case: Diebold

Began to sell ATM machines in foreign markets in 1980s 1980 Di 1980s Distribution t ib ti agreement t with ith Philips Phili 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebolds Diebold s total revenues Diebold decides to go it alone with local manufacturing f t i presence for f local l l customization t i ti

Through acquisitions joint ventures j

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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

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Which foreign g markets

Favorable
Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or private-sector debt

Unfavorable

Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing

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Timing g of entry y

Advantages in early market entry:


First-mover advantage. Build sales volume. volume Move down experience curve and achieve cost advantage. g

Disadvantages:
First mover disadvantage g -p pioneering g costs. Changes in government policy.

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Scale of entry y

Large scale entry


Strategic Commitments - a decision that has a long term impact and is difficult to reverse. long-term reverse May cause rivals to rethink market entry. May M l lead d to t indigenous i di competitive titi response.

Small scale entry:


Time to learn about market. Reduces exposure risk.

TYPES OF STRATEGIC ALLIANCES

EQUITY ALLIANCES NON EQUITY ALLIANCES

JOINT VENTURES

Entry modes
1.Non Equity Based Modes Exporting Counter trade Sub Contracting/ Turnkey T k Projects P j t Licensing Franchising Management Contract.

2. Equity Based Modes


Wholly Owned Subsidiaries 1 1. A Acquisitions/ i iti / With Alli Alliance 2. Green field / Without Alliance

1 EXPORTING 1.
1.DIRECT 1 DIRECT ADF, Raymonds, Shaw wallace 2. INDIRECT EX-Himalaya Publishing House, baskins y exported p its Icecream to Robbins initially Russia till 1990 & later on opened outlets plant in 1995. and later on established a p

3 3. Intra Corporate Transfers Selling the products by a co. to its affiliated co in host country co. country. Ex. Selling of products by HLL to Unilever in USA.

2. Counter trade
Arrangements whereby the flow of goods or services in both directions is an integral element of the specific terms of the business transaction. ExEx Pepsi in USSR The first form is barter . The second type is counter purchase.

Contract Manufacturing
Contract manufacturing is outsourcing entire or part of manufacturing operations. Ex-1. Nike has contracted with a nos. of factories in south East East Asia to manufacture its athletic footwear . 2B 2.Bata also l h has contracts with i h several l cobblers in India to produce footwear's & it concentrates on mktg. k

Turnkey Project
A Turnkey contract is a contract under which a firm fi agrees t to f fully ll d design, i construct, t t equip i a manufacturing or a service facility & hand it to purchaser/contracting party when it is complete. Exporter of a turnkey project may be
Contractor that specializes in designing and erecting plants in a particular industry Company that wishes to earn money from its expertise Ex- Nuclear power, oil refinery, national highways, railway lines etc etc. BT,BOT, BOLT

Turnkey Project
Company designs, designs constructs, constructs and tests a production facility for a client
+ Firms specialize in core

Advantages

competency + Nations obtain infrastructure projects

DisadvantagesS

Politicized process Create competitor

Licensing
-A contractual arrangement: one firm sells
access to its patents, trade secrets, or technology gy to another Licensee pays fixed sum and sales royalties ( (2%-5%) ) Cross Licensing( In Pharma Co.) Ex- Fuji j Xerox , Nike entered by y licensing g to Sierra Indstrl. Ltd.

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What the the Licensor Delivers to the What Licensor Delivers toLicensee the Licensee in in Complex Licensing Agreements

C l Li i A t Complex Licensing Agreements

A patented t t d product d t or service i A trademark or trade name Manufacturing techniques Proprietary p y rights g g generally y referred to as company p y or industry y know-how Supply by the licensor to the licensee of components or equipment i t Technical advice and services of various sorts Marketing advice and assistance of various sorts

Licensing
Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specified time + Finance expansion p + Reduce risk Advantages + Extend obsolete products + Upgrade technologies + Avoid regulations of host country.

Disadvantages

Restrict licensors licensor s future Reduce global consistency Potential competitor Product P d t quality lit

Franchising
Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules. Major forms: 1. 1 Manufacturer Retailer SystemSystem Automobile 2. Manufacturer Wholesaler System- Soft drinks. 3Firm Retailer System-Fast foods 4 Reverse/Cross franchisees-ITC& ITT Sheraton

Franchising
Company (franchiser) supplies another (franchisee) with intangible property over an extended period

Advantages

+ Low cost and low risk + Rapid expansion + Local knowledge

Disadvantages

Cumbersome Lost flexibility

As you may or may not know, being a franchise is a legally defined term that contains three elements: l t 1. The use of a common trademark; 2. The provision of operational support or assistance training assistance, training, or the e exercise ercise of significant operating control; 3. The payment of a fee ( over and above the sale of the products at a bona fide wholesale price) this would included initial fees, fees royalties, royalties advertising revenues, training fees, etc.

If we eliminate one of these elements, we can avoid id franchise f hi laws. l you will either have a consulting agreement or a business opportunities / Management Contract Take away the you have a trademark support, so that you license. offer the trade mark alone for a fee, fee Take away the fee a joint venture (sharing profits)/ Agency Take away the trademark element,

Licensing v/s Franchising


Term Royalty is normally used. Licenses are usually taken by established brands Production sector Term of 16-20 years are common, Licensees tend to self selected Licensee can often pass license to any other unconnected co. with little or no reference to licensor Concerns specific existing products with very little benefit being passed on to licensee Mgt. Fee is the term

used. used
It is resorted more by start up firms. Service industry industry. 5-10 years are common The Franchisee is selected Such replacement is selected by franchisor. In this the franchiser is expected to pass on the benefits of ongoing research to franchisee.

Management Contract
Arrangement/ Agreement by which one firm provides managerial assistance, technical expertise, and other specialized services in all or specific areas to another firm for a certain agreed period in return of monetary compensation. ti 1.A Flat Fee. 2P 2.Percentage over sales. l 3.Performance bonus based on sales, production, profitability fit bilit quality lit measures etc. t

Management Contract
Company supplies another with managerial expertise for a specific p period p of time
Advantages
+ Few assets risked + Nations finance projects + Develops local workforce

Disadvantages
Personnel at risk Create competitor

Wholly y owned subsidiary y


S Subsidiaries b idi i could ld b be G Greenfield fi ld investments or acquisitions
Advantages: Ad t No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies. Disadvantage:

Bear full cost and risk

Mergers g & Acquisitions q


What is a merger???
A Merger happens when 2 firms agree to go forward f d as a single i l new id identity tit rather th then remain separately owned & operated. This kind of action is more precisely referred to as a merger of equals. Example-when both Daimler & Chrysler ceased to exist & DaimlerChrysler y was created.

What is an Acquisition q ???


When one co. takes over another and clearly establishes itself as a new owner. From legal point of view the target co. y swallows the ceases to exist & the buyer business .

Difference between the two concepts


When 2 firms together form a new company When one co. takes over another and clearly establishes itself as a new owner.

when a deal is made In an unfriendly deal, between two companies p where the stronger g firm in friendly terms, swallows the target firm,

Mergers & Acquisitions Defined


Types of M&A Activity FTC Categories Vertical Related Horizontal suppliers or customers competitors

p yp products Product Extension complementary Market Extension complementary markets Unrelated Conglomerate everything else

Reasons
1. Synergy 1 2. Increases revenue/market share. 3 R 3. Resource t transfer. f 4. Economies of scale. 5. Taxes

Few M&A
Coca Cola - PARLE PRODUCTS PRODUCTS. Videocon Daewoo. Mitt l Arcelor Mittal A l Tata- Tetley Siemens- Osram Ranbaxy- Daiichi Sankyo Ranbaxy

Joint Ventures
When 2 or more firms join together to create a separate new entity that is legally distinct from its parents. JV involve shared ownership ownership.
corporate entity formed by international company and local owners corporate entity formed by two international companies for the purpose of doing business in a third market a corporate entity formed by a government EX TATA-TETLEY, PPP, M&M-Renault, MNAL etc. t

Advantages: Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk. Disadvantages differences diff i in partner t aims i and d objectives bj ti equal ownership and different options can slow decision making dominance by one partner can lead to resentment in the other Large time commitment for education, negotiation and agreement with partner

Green field / Without Alliance


It means starting with a virgin site and then working upon it. Starting from the scratch. scratch The co. conduct the market surveys, selects l t th the l location, ti b buy or l lease th the l land, d create a working unit, remit finances etc.

When a form decides to expand beyond local borders. It may y choose to create an entirely y new organisation as per its own specifications p which lead to the implementation of a greenfield project. On the other hand, if it feels that it is necessary to speed up the entry process into international territory, p y then acquisition is the best alternative.

LNM LNM- in Jharkhand Mercedes Benz in Alabama Disney Di i in P Paris i Hyundai Motor Company in Czech Republic ( KIA car)

Acquisition

and Green-field-

pros & cons


Pro: P Quick to execute Preempt competitors Possibly less risky

Con:

Disappointing results Overpay for firm optimism about value creation (hubris) Culture clash. Problems with p proposed p synergies y g

Greenfield
Pro:

Can build subsidiary it wants

Easy to establish operating routines Con:


Slow to establish Sl bli h Risky

Preemption by aggressive competitors