UNIT-2

Global Market Entry Strategies

When you know the scale of entry, you will need to work out how to take your
business abroad. This will require careful consideration as your decision could
significantly impact your results. There are several market entry methods that can
be used.

Exporting

Exporting is the direct sale of goods and / or services in another country. It is

possibly the best-known method of entering a foreign market, as well as the lowest
risk. It may also be cost-effective as you will not need to invest in production
facilities in your chosen country – all goods are still produced in your home
country then sent to foreign countries for sale. However, rising transportation costs
are likely to increase the cost of exporting in the near future.

The majority of costs involved with exporting come from marketing expenses.
Usually, you will need the involvement of four parties: your business, an importer,
a transport provider and the government of the country of which you wish to
export to.

Licensing

Licensing allows another company in your target country to use your property. The
property in question is normally intangible – for example, trademarks, production
techniques or patents. The licensee will pay a fee in order to be allowed the right to
use the property.

Licensing requires very little investment and can provide a high return on
investment. The licensee will also take care of any manufacturing and marketing
costs in the foreign market.

Franchising

Franchising is somewhat similar to licensing in that intellectual property rights are

sold to a franchisee. However, the rules for how the franchisee carries out business
are usually very strict – for example, any processes must be followed, or specific
components must be used in manufacturing.
Jointventure

A joint venture consists of two companies establishing a jointly-owned business.

One of the owners will be a local business (local to the foreign market). The two
companies would then provide the new business with a management team and
share control of the joint venture.

There are several benefits to this type of venture. It allows you the benefit of local
knowledge of a foreign market and allows you to share costs. However, there are
some issues – there can be problems with deciding who invests what and how to
split profits.

Foreigndirectinvestment

Foreign direct investment (FDI) is when you directly invest in facilities in a foreign
market. It requires a lot of capital to cover costs such as premises, technology and
staff. FDI can be done either by establishing a new venture or acquiring an existing
company.

Whollyownedsubsidiary
A wholly owned subsidiary (WOS) is somewhat similar to foreign direct
investment in that money goes into a foreign company but instead of money being
invested into another company, with a WOS the foreign business is bought
outright. It is then up to the owners whether it continues to run as before or they
take more control of the WOS.

Piggybacking

Piggybacking involves two non-competing companies working together to cross-

sell the other’s products or services in their home country. Although it is a low-risk
method involving little capital, some companies may not be comfortable with this
method as it involves a high degree of trust as well as allowing the partner
company to take a large degree of control over how your product is marketed
abroad.

EXPORTING

Exporting is defined as the sale of products and services in foreign countries that
are sourced or made in the home country. Importing is the flipside of
exporting. Importing refers to buying goods and services from foreign sources and
bringing them back into the home country. Importing is also known as global
sourcing.

An Entrepreneur’s Import Success Story

Selena Cuffe started her wine import company, Heritage Link Brands, in 2005.
Importing wine isn’t new, but Cuffe did it with a twist: she focused on importing
wine produced by black South Africans. Cuffe got the idea after attending a wine
festival in Soweto, where she saw more than five hundred wines from eighty-six
producers showcased. Cuffe did some market research and learned of the $3 billion
wine industry in Africa. She also saw a gap in the existing market related to wine
produced by indigenous African vintners and decided to fill it. She started her
company with $70,000, financed through her savings and credit cards. In the first
year, sales were only $100,000 but then jumped to $1 million in the second year,
when Cuffe sold to more than one thousand restaurants, retailers, and grocery
stores. Even better, American Airlines began carrying Cuffe’s imported wines on
flights, thus providing a steady flow of business amid the more uncertain restaurant
market. Cuffe has attributed her success to passion as well as to patience for
meeting the multiple regulations required when running an import business.

Exporting is an effective entry strategy for companies that are just beginning to
enter a new foreign market. It’s a low-cost, low-risk option compared to the other
strategies. These same reasons make exporting a good strategy for small and
midsize companies that can’t or won’t make significant financial investment in the
international market.

Companies can sell into a foreign country either through a local distributor or
through their own salespeople. Many government export-trade offices can help a
company find a local distributor. Increasingly, the Internet has provided a more
efficient way for foreign companies to find local distributors and enter into
commercial transactions.

Distributors are export intermediaries who represent the company in the foreign

market. Often, distributors represent many companies, acting as the “face” of the
company in that country, selling products, providing customer service, and
receiving payments. In many cases, the distributors take title to the goods and then
resell them. Companies use distributors because distributors know the local market
and are a cost-effective way to enter that market.
However, using distributors to help with export can have its own challenges. For
example, some companies find that if they have a dedicated salesperson who
travels frequently to the country, they’re likely to get more sales than by relying
solely on the distributor. Often, that’s because distributors sell multiple products
and sometimes even competing ones. Making sure that the distributor favors one
firm’s product over another product can be hard to monitor. In countries like
China, some companies find that—culturally—Chinese consumers may be more
likely to buy a product from a foreign company than from a local distributor,
particularly in the case of a complicated, high-tech product. Simply put, the
Chinese are more likely to trust that the overseas salesperson knows their product
better.

Why Do Companies Export?

Companies export because it’s the easiest way to participate in global trade, it’s a
less costly investment than the other entry strategies, and it’s much easier to simply
stop exporting than it is to extricate oneself from the other entry modes. An export
partner in the form of either a distributor or an export management company can
facilitate this process. An export management company (EMC) is an independent
company that performs the duties that a firm’s own export department would
execute. The EMC handles the necessary documentation, finds buyers for the
export, and takes title of the goods for direct export. In return, the EMC charges a
fee or commission for its services. Because an EMC performs all the functions that
a firm’s export department would, the firm doesn’t have to develop these internal
capabilities. Most of all, exporting gives a company quick access to new markets.

Benefits of Exporting: Vitrac

Egyptian company Vitrac was founded by Mounir Fakhry Abdel Nour to take
advantage of Egypt’s surplus fruit products. At its inception, Vitrac sourced local
fruit, made it into jam, and exported it worldwide. Vitrac has acquired money,
market, and manufacturing advantages from exporting.

 Market.The company has access to a new market, which has brought added
revenues.
 Money.Not only has Vitrac earned more revenue, but it has also gained
access to foreign currency, which benefits companies located in certain
regions of the world, such as in Vitrac’s home country of Egypt.
  Manufacturing.The cost to manufacture a given unit decreased because
Vitrac has been able to manufacture at higher volumes and buy source
materials in higher volumes, thus benefitting from volume discounts.

Risks of Exporting

There are risks in relying on the export option. If you merely export to a country,
the distributor or buyer might switch to or at least threaten to switch to a cheaper
supplier in order to get a better price. Or someone might start making the product
locally and take the market from you. Also, local buyers sometimes believe that a
company which only exports to them isn’t very committed to providing long-term
service and support once a sale is complete. Thus, they may prefer to buy from
someone who’s producing directly within the country. At this point, many
companies begin to re

Exporting mainly be of two types: Direct exporting and Indirect exporting.

Direct exporting:
Direct exporting means sale of goods abroad without involving middlemen. In case of direct exporting a
firm itself undertakes selling its products overseas and is responsible for dealing with foreign firms
directly. A firm may carry on direct exporting by any one of the following modes:
 By establishing company’s own corporate export provision.
 By appointing foreign sales representative and agent.
 Through foreign based distributors and retailers/agents.
 Through foreign based state trading corporation.
 Through overseas sales branches.
In-direct exporting:
In-direct exporting means sale of goods abroad through middle men. Indirect exporting, involves
using the help of independent middle men and sales intermediaries that take the responsibility of sending
the products to foreign countries. Some major types of intermediaries of indirect exporting are as under:
 Commission agents.
 Domestic based export merchants or export trade companies.
 Buying or purchasing agents.
 Export agents.
 Export management companies.
 Cooperative organizations.
There are two types of indirect exporting:
1. Occasional exporting.
2. Active exporting.
Occasional exporting or passive exporting takes place when company exports from time to time either
on its own initiative or in response to unsolicited orders from abroad. Active exporting takes place when
the company makes a commitment to expand its exports to a particular market.
The main difference between direct and indirect exporting is that the manufacturer performs the
export task himself in case of direct exporting while the manufacturer delegates the export task to others
(middle men) in case and indirect exporting. As a result, the costs and risks involved in indirect
exporting are less than those involved in direct exporting.
Advantages of indirect exporting over direct exporting.
 Indirect exporting involves less investment. The firm does not have to develop an export
department, an overseas sales force or a set of foreign contacts.
 Indirect exporting involves less risk. Because international marketing intermediaries bring know
how and services to the relationship, the seller will normally make fewer mistakes.

Different types of export goods as per Government Policy

Classifications of Goods for Exports

Permissibility of import and export goods, is governed by the nomenclature, ITC

(HS) classification of Import and export of goods published by the Directorate
General of Foreign Trade (DGFT), in this nomenclature, goods are arranged. They
are arranged as they are in the Harmonised System (HS) but are codified by ten
digit numerical code to Identity goods with more precision for purposes of
import/export control.

All goods other than the entries in the export licensing schedule along with its
appendices are freely exportable. The free exportability is however subject to any
other taw tor the time being in force. Goods not listed in the Schedule are deserted
to be freely exportable without conditions under the Foreign Trade (Development
and Regulations) and Regulations) Act, 1992 and the rules, notifications and other
public notices and circulars issued thereunder from time to time.
Goods listed as "Frees in the Export Licensing Schedule may also be exported
without an export license as such but they are subject to conditions laid out against
the respective entry. The fulfilment of these conditions can be checked by
authorized officers in the course of export.

Classification of Goods for Exports:

(a) Prohibited Goods: Prohibited items are not permitted to be exported. An

export licence will not be given in the normal course for goods in the prohibited
category. Some of the prohibited items of exports are all forms of wild animals,
exotic birds, beef, sea shells, human skeleton, peacock feathers, etc.

(b) Restricted Goods: The restricted items can be permitted for export under

licence. The procedures/conditions wherever specified against the restricted items
may be required to be complied with, in addition to the general requirement of
licence in all cases of restricted items.

(c) State Trading Enterprises: Export through State Trading Enterprises STE(s)

is permitted without an Export Licence through designated STEs only as
mentioned against an item and is subject to conditions of EXIM Policy.

(d) Restrictions on Countries of Export: Export to Iraq is subject to conditions as

specified in Exim Policy and other conditions which may be listed in the title ITC
(HS) Classification of Export and Import items.

(b) Export Marketing Plan: Planning is essentially the main task of management

- where strategic vision and operational insight are brought together and translated
into action. An export marketing plan is a step-by-step guide for strategy
implementation. A typical export marketing plan focuses on:

Marketing objectives,
Market segmentation,

Market research,

Characteristics of product,

Export pricing,

Distribution channels; and

Promotional strategies.

Different categories of exporters

Types of Exporters

On the basis of direct and indirect methods of exporting, export market

organisations in India are classified into the following categories:

(a) Manufacturer Exporters: Manufacturer exporters are the manufacturers who

export goods directly to foreign buyers without any intervention from
intermediaries. The manufacturer may also appoint agents abroad for selling
products. They enjoy several advantages:

First hand information about foreign markets.

Exercise a direct control over marketing activities.

Enjoy full benefit of export incentives.

Enjoy greater profits and goodwill in the market.

(b) Merchant Exporters: Merchant exporters are the exporters who purchase
goods from the domestic market and sell them in foreign countries. They enjoy
several advantages:

Limited capital.

Specialization in marketing.

Large market share.

(c) Status Holders: The Government of India introduced the concept of status

holders in the in the year 1960. Export House (EH) was the first category
introduced by the Government with the objective of promoting exports by
providing assistance for building marketing infrastructure and expertise required
for export promotion. Thereafter in the year 1981, Trading Houses were introduced
in order to develop new products and new markets, particularly for the products of
SSls and Cottage industries. The categorisation, their eligibility and nomenclatures
have changed since then. As per the new Foreign Trade Policy 2009-2014, status
holders have been categorised as follows on the basis of their export performance:

(d) Service Export House: Considering the increasing share of services in the

total export from India, the government introduced the concept of Service Export
House in the EXIM policy 2002-07. As per this policy, the service providers who
have achieved a stipulated level of export performance are eligible for recognition
of status holder. Accordingly they are eligible for all the facilities and incentives,
hitherto given to the export and trading houses. These facilities include import of
capital goods under EPCG scheme, passenger baggage, import of restricted items,
etc. The above categorisation also applies to the service providers.

(e) Canalising Agencies: Canalisation of import and export means import and

export of commodities through specified government agencies such as State
Trading Corporation of India (STC), Metals and Minerals Corporation (MMTC).
The items specified in the canalised list can be canalised only through specified
canalising agency.

(f) Export Consortia: In this case, a number of economically independent

manufacturers, voluntarily or under the direction of the government, set up a joint
organisation for co-ordination of their export activities. This has several
advantages, such as;

Price stabilisation;

Saves unproductive expenditures such as advertising;

Economies of scale.

Entry strategies for Indian markets

1. Find the right partner

India is the world’s seventh largest economy in terms of GDP, and has a
population of 1.3 billion people. It is a complex market for the best Indian
companies, and even more so for companies from abroad. Businesses with a
pre-determined mindset and less exposure to international markets might find
the commerce culture in India too intimidating. Identifying the right partner
goes a long way in successfully navigating the complexities of the local
business environment for a new entrant into the Indian market. A local partner
can provide much-needed assistance in understanding the Indian market. This
partner can give you valuable market insights on competition, regulation and
other important issues. They can also introduce you to the network with the
reach to target prospective clients without much investment on the ground.

2. Localize your products to meet consumer needs and preferences

 India is a vast and diverse country encompassing many different identities,
languages, cultures and religions. It is important to avoid making
generalizations or assumptions, as local practices and consumer behavior
may vary substantially from region to region. Since India has such a
pluralistic, multilingual society, more often than not, a one solution fits all
approach doesn’t work.  Even a global bigwig like McDonald’s had to
localize its product offerings based on the fact that half of Indians are
vegetarian. They also have to leave their most popular item, beef burgers, off
the shelf given the religious sensibilities of the Indian population.
3. Remember the high level of price sensitivity
It is extremely important for a new entrant into the Indian market to get its
price strategy right, particularly if it’s targeted towards the low and middle
income populations. Even with a growing economy and a burgeoning
middle class, there’s no denying the fact that India is still a low middle
income economy, with a per capita income of around $2,000 and a huge
population still living below the poverty line. Since the government cannot
afford to provide for education and healthcare coverage, the majority of the
population has to pay for these necessities from their own income.  With
little disposable income left after covering basic amenities, there’s not much
money left in the hands of a significant portion of the population. This
makes the market price sensitive as many people need to spend judiciously.

4. Enter the Indian market for long-term growth, not to make a quick
buck
India is certainly not a place for businesses to make quick gains – you need
to be invested for the long haul. Although it’s a huge market with a
population of 1.3 billion people, including 400 million middle class
consumers, it has its share of challenges when it comes to market entry.
Because India is such a huge and attractive opportunity, there is no dearth of
competition. More often than not, you have companies looking for market
share and compromising on potential short-term profitability in order to
establish themselves more firmly there. Given the complexity of the market,
it takes time for the companies to understand the environment and develop
the right strategy.
5. Prepare to navigate a much different legal and regulatory landscape
 The Indian judicial system follows “common law”, and the constitution has
provided for a single integrated system of courts to administer both union
and state laws. Due attention should be paid, including seeking professional
advice, before entering into a formal agreement. Court judgements are often
delayed because of the huge backlog of cases, so any agreement should
provide the scope for alternate dispute resolution mechanisms.
Original article: https://www.tradeready.ca/2016/topics/market-entry-
strategies/5-tips-better-indian-market-entry-strategy/

DOMESTIC PURCHASE

MAKE OR BUY

Make-or-Buy Checklist

It is better if the company is able to prepare a checklist for each of the factors to be
considered. Answers to the select questions in each factor will help an analyst
make decision on the basis of scientific and logical reasoning. A typical checklist
may consists of the following questions:

i) Quantity Factors:
Adherence to specifications? Quality control setup? Is proper
equipment available? Experience in this type of work? Who pays
for bad parts?

ii) Capacity Factors: Is space available? Is available space obtainable?

Is machine time available? Must machinery be bought? Are
outside finishing operations required? Is sales relationship a factor?
Is stability or supplier relationships a factor? How much working
capital is needed for inventory? Is new capital investment needed?
How much use have we for the new equipment? What return can
we expect?
iii) iii) Labour Factors: Would layoffs be created? Would it help us
hold the organization together? Must staff be increased? Is special
training necessary? Are there union pressures? Is the labour rate
competitive?
 iv) iv) Scheduling Factors: Can we get all necessary components on
time? Have we the capacity to adjust to peaks or slowdowns?
Would timing be surer with added sources? Are engineering
changes frequent?
v) Skill Factors: Is the best design experience available? Is the part
natural to us? Is this the most profitable use of our executive’ time?
Is design-assistance relationship a factor? Do we have adequate
measures of inside efficiency?
vi) vi) Cost Comparison (on the basis of 100 pieces): Material cost,
operations cost (direct labour, overhead, and profit), setup cost,
tools repair allowance and spoilage, packing and shipping costs
from outside supplier, tool charge (cost of tools per 100 pieces).
This is a very complete and scientific evaluation of the problem,
dealing principally with the internal company factors involved.
However, it should be pointed out that make-or-buy decisions also
have external effects and that there are some long-range
considerations of this nature that should also have serious
attention. The checklist section on capacity factors recognizes this
by querying the effect on sales relationships and the stability of
supply relationships. It is not uncommon, in times of business
decline, for manufacturers to switch from buying to making certain
parts when excess capacity shows up in their own plants. Even if
this is done as a temporary measure, rather than as a considered
policy based on economy of manufacture, the immediate effect is
to leave the suppliers of these parts stranded and to intensify for
them the hardships of the business decline, The purchasing
manager may well question the wisdom of such use of the make-
or-buy alternative, especially if the decision is of a temporary
nature. For, when business picks up and the buyer once again seeks
parts and service from that vendor, the buyer will almost certainly
find that the supplier relationship has deteriorated. In extreme
cases, he or she may actually have lost that source of supply.

Foreign Manufacturing Strategies which do not Involve Direct Investment!

1) Licensing,

2) Franchising,

3) Contract manufacture,

4) Turnkey operations,

5) Management Contracts, and

6) Original Equipment Manufacturing.

1. Licensing:
Under a licensing agreement, a company (the licensor) grants rights to intangible
property to another company (the licensee) for a specified period; in exchange, the
licensee ordinarily pays a royalty to the licensor. The rights may be exclusive
(monopoly within a given territory) or nonexclusive.

Licensing agreements are most common on the use of patents, trademarks,

copyrights and unpatented technology. The licensor does not have to risk placing
tangible assets, such as plant and equipment, abroad. The licensee may find that
the cost of the arrangement is less than if it developed the intangible property on its
own.

It permits a foreign company to use industrial property (i.e., patents, trademarks,

and copyrights), technical know-how and skills (e.g., feasibility studies, manuals,
technical advice, etc.), architectural and engineering designs, or any combination
of these in a foreign market. Essentially, a licensor allows a foreign company to
manufacture a product for sale in the licensee’s country and sometimes in other
specified markets.

Reasons for Licensing:

1) Granting of licensing protects the company’s patent and trademark against
cancellation for non-use.

2) Licensing helps in overcoming trade barriers.

3) Licensing works well when transportation cost is high, especially relative to
product value.

4) By licensing, company extends its brand into newer product categories.

5) In some countries, government prefer licensing mode of entry.

6) Some company use licensing as a means of preventing competitive technology

from achieving market success.

7) Companies prefer licensing as it is not very demanding on company resources.

It is specifically appealing to small companies that lack the resources.

8) Companies that use licensing as part of international expansion strategy lower

their exposure to political or economic instabilities in their foreign markets.

9) In highly competitive markets, rapid penetration of global markets allows the

licensor to define the leading technology standards and to rapidly amortize
research and development expenditure.

10) In industries with high visibility, local government buyers often prefer to
purchase from local manufacturer which result in formation of a club whereby
foreign competitors find it difficult to gain any market share.

Advantages of Licensing:
1) Licensing offers a small business many advantages, such as rapid entry into
foreign markets and virtually no capital requirements to establish manufacturing
operations.

2) Returns are usually realized more quickly than for manufacturing ventures.

3) Licensing mode carries relatively low investment on the part of licensor.

4) Licensor can investigate the foreign market without much effort on his part.

5) Licensee gets the benefits with less investment on research & development.
6) Licensee escapes himself from the risk of product failure. For example,
Nintendo game designers have the relatively safety of knowing millions of game
system units.

7) Compared to export entry, the most evident advantage of licensing is the

circumvention of import restrictions and transportation costs in penetrating foreign
markets

8) International licensing is most commonly combined with other entry modes.

9) It does not require capital investment or presence of the licensor in the foreign
market.

10) Ability to generate royally income from existing intellectual property.

11) Useful when trade barriers reduce the viability of exporting or when
governments restrict ownership of local operations by foreign firms.

12) Useful for testing a foreign market prior to entry via FDI.

Disadvantages of Licensing:
1) The most critical disadvantage of licensing as an entry mode is the licensor’s
lack of control over the licensee’s marketing program.

2) Another disadvantage is the lower absolute size of returns from licensing

compared to returns from export or investment.

3) The licensee may become a competitor if too much knowledge and know-how is
transferred. Care should be taken to protect trademarks and intellectual property.

4) Licensing agreements reduce the market opportunities for both the licensor and
licensee. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.

5) Risk of losing control of important intellectual property or dissipating it to

competitors.
6) There is scope for misunderstanding between the parties despite the
effectiveness of the agreement. The best example is Oleg Casing and Jovan.

7) There is a problem of leakage of the trade secrets of the licensor.

8) Quality control may be difficult to achieve.

9) Difficult to maintain control over how the licensed asset is used.

10) The licensee may infringe the licensor’s intellectual property and become a
competitor.

11) Does not guarantee a basis for future expansion in the market.

2. Franchising:
Franchising is a means of marketing goods and services in which the franchiser
grants the legal right to use branding, trademarks and products and the method of
operation is transferred to third party – the franchisee – in return for a franchise
fee. The franchiser provides assistance, training and help with sourcing
components and exercises significant control over the franchisee’s method of
operation.

It is considered to be relatively less risky business start-up for the franchisee but
still harnesses the motivation, time and energy of the people who are investing
their own capital in the business. For the franchiser it has a number of advantages,
including the opportunity to build greater market coverage and obtain a steady,
predictable stream of income without requiring excessive investment.

Chan identifies two types of franchise. With product/trade franchises, e.g., car
dealerships, petrol service stations and soft drinks bottlers, the franchisees are
granted the right to distribute a manufacturer’s product in a specified territory.
Business format franchise is the growing sector and includes many types of
businesses, including restaurants, convenience stores and hotels. This type of
franchise includes the licensing of trademark and the system for operating the
business and the appearance of the location.
Franchising can take the form of single-unit franchising in which the arrangement
is made with a single franchisee or multi-unit in which the franchisee operates
more than one unit. The multi-unit franchisee may be given the responsibility for
developing a territory and opening a specified number of units alone or, as is
common in international markets, operating a master franchise, in which the master
franchisee can sub-franchise to others. In this case the master franchisee is
responsible for collecting the fees, enforcing the agreement and providing the
necessary services, such as training and advice.

There are also differences in the way local culture affects operations and one of the
main problems for franchisers is deciding to what extent the franchise format
should be modified to take account of local demands and expectations; e.g.,
McDonald’s has added spaghetti to the menu to compete more effectively with
Jollibee in the Philippines, Pizza Hut find that corn and not pepperoni sells well in
Japan and KFC find that gravy and pumpkin are popular in Australia.

Types of Franchising System:

1) Product Franchise:
The first and simplest category is the product franchise. Here, a franchisor is a
distributor who supplies goods to a retailer with the understanding that the retailer
will have the exclusive right to sell goods in a particular area of the market. This
market is usually, but not always, defined in geographic terms. Gas stations, car
dealerships, and some clothing companies are examples of this category. Early
examples of franchising were product franchises, such as the beer franchises in
England and Germany that began in the 1800s, some of which still persist today.

2) Manufacturing Franchise:
The second category of a franchise system, sometimes collapsed into the first, is
the processing or manufacturing franchise. Here, the franchisor provides the
particular specifications or a specific element which the franchisee uses in
producing the product. Soft drinks are a good example of the manufacturing
franchise. Other examples include companies who manufacture private label goods
that have a retailer’s label on them and firms that manufacture fashion apparel
under license to a designer label. The Callanen Watch Company (now a division of
Timex, Inc.) had a license to manufacture watches under the Guess label.
3) Business-Format Franchise:
The third type, the business-format franchise, developed in the post-war period
from the mid 1950s. In a business-format franchise arrangement the franchisor
provides franchisees with a comprehensive, often extensive, operating system.
Each franchisee must comply with the requirements of the system or risk losing the
franchise.

Many fast food restaurants, hotel chains, video rental, and travel agents are
examples of this category. For example, Burger King and McDonald’s fast-food
outlets, Pizza Hut and Dairy Queen restaurants, Holiday Inn and Best Western
hotels, 7-Eleven convenience stores, and Hertz and Avis car rentals. In Australia,
where franchising is a mature sector, business format franchising is the most
common form of franchise. Of a total of about 708 franchise systems reported in
Australia in 1999, 677 were business format franchises. It is the most utilized
format of franchising format in the current era and includes following forms:

i) Manufacturer-Retailer Franchise:
In this form, the manufacturer gives the franchisee the right to sell its product
through a retail outlet. Examples of this form include gasoline stations, most
automobile dealerships, and many businesses found in shopping malls.

ii) Wholesaler-Retailer Franchise:

Here, the wholesaler gives the retailer the right to carry products distributed by the
wholesaler. For example, Radio Shack (which also manufactures some of its
products), Agway Stores, Health Mart, and other franchised drug stores.’

iii) Service Sponsor Retailer Franchise:

It operates when a service firm licenses individual retailers to let them offer
specific service packages to consumers. For example, VLCC, India’s leading chain
of health beauty, and fitness centres, is managed and operated by its parent
company.

Advantages of Franchising:
1) Proven Market for the Product or Service:
Except for newly established franchises, a known market exists for the franchiser’s
product or service. Information about the performance of existing franchises is
normally supplied or can be obtained by the franchisee. Such a track record makes
it much easier to make projections for future operations.

This instant pulling power of the product also greatly helps the small business
owner shorten the duration of the initial stage of the business when the market is
being developed and resulting revenues are low.

2) Services that the Franchisor may provide:

A franchising company typically provides many valuable services to a franchisee.
A description of some of these franchiser services follows:

i) Selection of Location:
Assistance in selecting the location can be very important, especially if location is
critical to the success of the business, such as off-reserve businesses in retailing
and in the service industry. Often a franchiser has considerable site selection
expertise that can be used in establishing a business.

ii) Purchase or Construction of Site, Buildings, and Equipment:

The franchiser’s experience and financial resources in this area may mean
considerable savings of time and money. In addition to providing expertise, the
franchiser may even purchase or construct the facilities for the franchisee.

iii) Provision of Financing:

Some franchisers will provide financing for franchisees, and their association with
the franchisees often helps obtain financing. For example, the Royal Bank, through
its Franchise Assistance Program, allows favourable interest rates on franchisee
loans because of a franchisee’s association with a well-known franchiser. A
franchise organisation may also successfully deal with the financing difficulties
experienced by aboriginal businesses located on reserves.

iv) Standardized Methods of Operating:

Standard operating procedures and manuals are often part of the service the
franchiser provides in the areas of cost accounting, control systems, and customer
service standards. Such methods can result in considerable savings for the small
business.
v) Advertising:
Most franchisers will provide national advertising that may benefit the franchisee.
Such a level of promotion may be difficult and costly for the franchisee to develop
unassisted.

3) Purchasing Advantages:
Because the franchising company purchases large volumes of inventories for its
franchisees, it can pass resulting cost savings on to the franchisees on purchases
made from the franchiser.

4) Training:
Most franchisers provide training to new franchisees. This may take the form of an
instruction manual or thorough training at a franchiser’s school. For example, a
McDonald’s franchisee receives training at Hamburger University and can even
receive a bachelor’s degree in Hamburger-ology! Because of the extra training
provided, franchising (as opposed to organising or buying) may be suited to
someone who lacks experience in the industry.

Because of these advantages, a franchisee’s chance of success in the business is

higher than that of an entrepreneur who organises or buys his or her small business.
The franchising industry advertises a failure rate from only 4 to 8%, which is much
lower than the rate for non-franchised businesses.

5) Marketing and Management Benefits:

Individuals across the country continue to use McDonald’s, Burger King,
Kentucky Fried Chicken, and Wendy’s because of their expectation of reliable
food products. Consumers have a tendency to utilize franchising organisations
because of their name, decor, logo, or perceived quality of their standardized
product or service. Franchising provides a proven successful business product
and/or service identification.

Probably, one of the greatest advantages of choosing a franchising method of doing

business is the opportunity to have access to the marketing and promotional image
of the franchise business. Most franchisors promote, advertise, and market their
name, logo, product, and service with the greatest of abilities and focus their
efforts on name recognition.
Through the repeated use of advertisements, billboards, and jingles, top-of-the-
mind awareness is quite high for many franchised businesses. The franchisee
acquires the right to use the franchisor’s nationally advertised trademark or brand
name. This allows, e.g., market recognition both locally, as well as with travelling
customers.

6) Quality Control Standards:

Each franchisor imposes certain quality control standards on the franchisee. These
standards allow the franchise system to achieve consistency and positive service or
product uniformity throughout the entire system. By developing and maintaining
high standards, the franchisor does the franchisee a tremendous business service.

Franchisees appreciate high standards and learn that these standards of operations
and performance are necessary and generally the major reasons for success. The
quality standards present a consistent patronage image, help to ensure return
business, develop employee morale, and pride in work, and allow the employees to
feel the value of teamwork. These standards, while apparently dictatorial, serve to
help both the franchisor and franchisee. Because the franchisees learn to
courteously and efficiently serve an appealing meal in an attractive and
comfortable atmosphere, they have a better chance to attract and maintain a large
clientele which provides increased benefits and profits to them and larger royalties
to the franchisor.

7) Less Operating Capital Requirement:

Another major advantage for franchisees is that generally their start-up costs
require less initial operating capital because of lower initial costs in starting the
business. Most franchisees do not have to pay for architectural designs because
these are often provided at a nominal fee by the franchisor. The franchisees also
generally pay lower inventory fees because they already know generally what will
and will not sell.

New franchisees may also be able to receive trade credit from different suppliers
because of their association with the franchising system rather than being an
independent person. Franchisees also receive the benefit of knowledge relative to
store layout, design, and floor space utilization which allows them to save
countless hours and dollars in developing the new business.
8) Opportunities for Growth:
Many franchisors provide new franchisees the opportunity to grow, not just with
the initial franchise unit, but also by later on purchasing additional franchise
locations. A territorial franchise guarantees no competition from other franchisees
or corporate stores within the specific geographic boundary. The area development
agreement allows the franchisee the possibility of developing new stores within the
specified territory during the specific period of time. The franchisee has the
opportunity to develop the first store and to allow it to grow and expand
throughout its system.

Disadvantages of Franchising:
1) Lack of Independence:
In signing a franchise contract the franchisee can expect to receive a certain
amount of assistance from the franchiser. The franchiser will monitor the business,
however, to ensure that the conditions of the contract are being met. This condition
restricts the franchisee’s freedom and independence.

2) Cost of the Franchise:

Most franchises have a price consisting of an initial fee and continuing royalties
based on operations. To enter most franchise organisations, individuals will have to
accumulate a certain amount of capital to either pay the fee or provide the
facilities.

3) Promises not fulfilled:

Most franchising companies indicate they will provide such services as training
and advertising. In some cases, however, this assistance does not materialize or is
inadequate.

4) Restrictions of the Contract:

The franchise contract may contain some restrictions that inhibit a franchisee’s
freedom. Such restrictions include the following:

i) Product or Service Offered:

The franchisee may not be allowed to offer for sale any products not procured by
the franchiser.
ii) Line Forcing:
The franchisee may be required to offer the franchiser’s complete line of products
for sale, even if some are not profitable in his or her market area.

iii) Termination:
The franchisee may not be able to terminate the franchise contract without
incurring a penalty. The franchisee may be prohibited from selling the business or
passing it on to family members.

iv) Saturation of the Market:

In some industries, franchising companies have allowed over saturation to occur in
a particular geographic market This puts financial pressure on those franchisees
operating within that market. If a franchiser has a large initial fee and no royalties,
its major concern may be the selling of franchises rather than the ongoing success
of Individual franchises.

v) Lack of Security:
A franchiser may elect not to renew a franchise contract once it has expired or may
terminate a contract prior to its expiry if the franchisee has violated the terms or
conditions.

vi) Cost of Merchandise:

The cost of merchandise purchased from the franchiser may exceed the price that
the franchisee can obtain elsewhere. However, the contract may require the
franchisee to purchase from the franchiser.

3. Contract Manufacture:
A firm which markets and sells products into international markets might arrange
for a local manufacturer to produce the product for them under contract. Examples
include Nike and Gap, both of whom use contract clothing and shoe manufacturers
in lower labour-cost countries. The advantage of arranging contract manufacture is
that it allows the firm to concentrate upon its sales and marketing activities and,
because investment is kept to a minimum, it makes withdrawal relatively easy and
less costly if the product proves to be unsuccessful.
Contract manufacture might be necessary in order to overcome trade barriers and
sometimes it is the only way to gain entry to a country in which the government
attempts to secure local employment by insisting on local production. If political
instability makes foreign investment unwise, this may be the best way of achieving
a marketing presence without having the risk of a large investment in
manufacturing.

The disadvantage of contract manufacture as an entry method is that it does not

allow the buyer control over the manufacturer’s activities. In the brewing industry
there are a variety of arrangements where brewers contract the manufacture of beer
brands but other market entry methods are used by the beer brand owners to
increase market share.

India’s contract manufacturing business is expected to nearly triple in revenue over

the next five years, according to a new study. Revenue generated by electronics
manufacturing services (EMS) providers and original design manufacturers
(ODMs) in India will rise from $774 million in 2004 to $2.03 billion in 2009.

The growth of the EMS/ODM industry in India will contribute to India’s overall
electronics industry growth. The Indian electronics industry will grow from $11.5
billion in 2004 to $40 billion in 2010.

Over the next five years, the Indian contract manufacturing industry will not
threaten China’s position as the epicenter of electronics manufacturing. India’s
contract manufacturing activities primarily serve the nation’s indigenous demand.
OEMs primarily outsource manufacturing to cater to the Indian domestic market,
although export of Indian-assembled electronic goods does occur.

Advantages of Contract Manufacturing:

1) The company does not have to commit resources for setting up production
facilities.

2) It frees the company from the risks of investing in foreign countries.

3) If idle production capacity is readily available in the 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) Contract manufacturing also has the advantage that it is a less risky way to start
with. If the business does not pick up sufficiently, dropping it is easy; but if the
company had established its own production facilities, the exit would be difficult.

6) Moreover, contact manufacturing may enable the international firm to enlist

national support.

Disadvantages of Contract Manufacturing:

1) In some cases, there will be the loss of potential profits from manufacturing.

2) Less control over the manufacturing process.

3) Contract manufacturing also has the risk of developing potential competitors.

4) It would not be suitable in cases of high-tech products and cases whicli involve
technical secrets, etc.

4. Turnkey Projects:
Turnkey projects or contracts are common in international business in the supply,
erection and commissioning of plants, as in the case of oil refineries, steel mills,
cement and fertilizer plants, etc.; construction projects as well as franchising
agreements.

Indonesian Government during 1974 invited global tenders for construction of a

sugar factory in the country. Indonesia Government received the tenders from the
companies of USA, UK, France, Germany and Japan. One of the Japanese
Company quoted highest price compared to all other companies.

Indonesian Government studied the quotation of this Japanese company. This

quotation includes: development of the fields for growing sugarcane, development
of seedlings, construction of sugar factory, roads, communication, power, water
etc., connecting the factory, train the local people, development of the distribution
channels in Indonesia, production of by-products and their market, plans for the
export of surplus sugar etc. it also made a provision for the transfer of the factory
along with the total package to the Indonesian Government and follow- up the
activities after it is transferred to the Indonesian Government.

Indonesian Government was very much satisfied with the total package and invited
the Japanese company to implement the project. The Japanese company and
Indonesian Government entered an agreement for implantation of this project by
the Japanese company for a price. This project is called ‘Turnkey Project.’

A turnkey project is a contract under which a firm agrees to fully design, construct
and equip a manufacturing/business/service facility and turn the project over to the
purchaser when it is ready for operation for remuneration. The form of
remuneration includes:

1) A fixed price (firm plans to implement the project below this price)

2) Payment on cost plus basis (i.e., total cost incurred plus profit)

This form of pricing allows the company to shift the risk of inflation/enhanced
costs to the purchaser.

Larsen and Toubro, and Mumbai’s Jyoti Structures Ltd and KEC International Ltd
are the three Indian companies that have been shortlisted from nearly a dozen for
turnkey operations including laying transmission lines and building a substation for
the 456 MW Upper Tamakoshi Hydroelectric Project, Nepal’s biggest hydel
project being built with domestic funding.

Advantages of Turnkey Contracts

The benefits arising from turnkey contracts include:

1) The opportunity at sell both components and other intangible assets,

2) Host government patronage which ensures that payments are made promptly
and may also lead to mutually beneficial relationship in other areas, and

3) For the host nation, the opportunity to build industrial complexes and train local
personnel.
These advantages must, however, be balance against the disadvantages which
include the fact that by building an industrial complex in a host country, the
possibility of exporting to or making other forms of investment in the market is
effectively lost, and that turnkey contracts may result in the purchase of
inappropriate technology. Designing and building complex and advanced industrial
facilities in a host country may require the permanent attention of the suppliers,
thus, perpetuating management and other contractual arrangements to the
detriment of the owner/purchaser.

Disadvantages of Turnkey Contracts

1) Lack of client control and participation.

2) Higher overall cost than traditional approach.

3) Limited flexibility to incorporate change.

4) A firm that enters into a turnkey project with a foreign enterprise may
inadvertently create a competitor.

5. Management Contracts:
The companies with low level technology and managerial expertise may seek the
assistance of a foreign company. Then the foreign company may agree to provide
technical assistance and managerial expertise. This agreement between these two
companies is called the management contract.

A management contract is an agreement between two companies, whereby one

company provides managerial assistance, technical expertise and specialized
services to the second company of the argument for a certain agreed period in
return for monetary compensation. Monetary compensation may be in the form of:

1) A flat fee or

2) Percentage over sales and

3) Performance bonus based on profitability, sales growth, production or quality

measures.
Management contracts emphasize the growing importance of services, business
skills and management expertise as saleable commodities in international trade.
Normally the contracts undertaken are concerned with installing management
operating and control systems and training local staff 10 take over when the
contract is completed. Many construction projects, such as the rebuilding of
Afghanistan and Iraq, were undertaken in this way.

Management contract could, sometimes, bring in additional benefits for the

managing company. It may obtain the business of exporting or selling otherwise of
the products of the managed company or supplying the inputs required by the
managed company. Some Indian companies – Tata Tea, Harrisons Malayalam and
AVT – have contracts to manage a number of plantations in Sri Lanka. Tata Tea
also has a joint venture in Sri Lanka namely Estate Management Services Pvt. Ltd.

Advantages of Management Contracts:

1) Foreign company earns additional income without any additional investment,
risks and obligations. 1

2) This arrangement and additional income allows the company to enhance its
image in the investors and mobilize the funds for expansion.

3) Management contract helps the companies to enter other business areas in the
host country.

4) The companies can act as dealer for the business of the host country‘s business
in the home country.

5) The expropriation or nationalization of a subsidiary where the parent company’s

commercial expertise is still required;

6) The development of a consultancy or technical aid contract into a” total

management contract.

7) Fees for management services may be easier to transfer, and subject to less tax,
than royalties or dividends.
8) Under-employed skills and resources are a common factor in deciding to opt for
management contracts. The licensing specialist may be in a position to negotiate
the contracts and employ a number of the other experts available at head office on
the project. The contracts provide a useful contribution to a global strategy. They
are particularly appropriate to the more difficult markets in the less developed and
the socialist countries; but they are also used in Europe.

9) Management contracts can provide support to other business arrangements like

technical agreements and joint ventures; and general support for existing markets
where indigenization or expropriation are likely. Minority equity holdings are also
safeguarded in this way.

10) Technologies are transferred very quickly.

11) Clients have new systems installed to a pre determined specification known to
have succeeded in other places.

Disadvantages of Management Contracts:

1) Sometimes the companies allow the companies in the host country even to use
their trade marks and brand name. The host country’s companies spoil the brand
name, if they do not keep up the quality of product service.

2) The host country’s companies may leak the secrets of technology.

3) Increase in potential competition as capacity is increased by new facilities.

6. Original Equipment Manufacturing (OEM):

In original equipment manufacturing (OEM) a company start el ling an unbranded
product or component to another company in global market. The purchasing
company markets the final product under its own brand name. In other words it can
be defined as “A company that buys a product and incorporates or re-brands it into
a new product under its own name”. For example, a maker of refrigerators like
Frigidaire might sell its refrigerators to a retailer like Sears to resell under a brand
name owned by Sears.
The supplying party of the product incurs a small or no amount in marketing their
product globally and the buyer get s a product ready to use and to market. The
supplier needs to give his – i effort in marketing the product overseas and if
needed, change their strategies later if they have strong overseas market for their
products.

An OEM may make complete devices or just certain components, either of which
can then be configured by the reseller. For example, the relationship would be a
large automobile manufacturer that uses an OEM’s components in the production
of the cars it make and sells. OEMs have begun in recent years to sell their
products more widely and in some cases, directly to the public.

Developments within the computer industry have played a role in this expansion.
As people choose to upgrade their PCs with new parts, they often wish to do so by
purchasing replacement parts that have been produced by the same manufacturer
that made the originally installed item. The assumption in this case is that
components and other processed items may work better or lit better if they, come
from the OEM. They are more likely to meet the original standards and product
specifications, established for the product OEM pats can be contrasted to other
replacement parts that may be referred to as “functionally equivalent” or “of like
kind and quality”.

It is the rebranding of equipment and selling it. The term initially referred to the
company that made the products (the original” manufacturer), but eventually
became widely used to refer to the Organisation that buys the products and resells
them. However the OEM reseller is often fee designer of the equipment, which
is .made to order.

Problems Solved Through OEM:

There are several problems of the business which are being solved by the help
of OEM, the problems are as follows:
1) Branding:
As OEM helps in selling the unbranded products and help those manufacturing
companies to have their own name which earlier do not globally known. It helps
the customers to get the product by the brand names.
2) Budget Constraint:
The budget problem is also another problem before the manufacturers of the
unbranded products. By the help of OEM they get relief from the budget
constraints. The business doesn’t pay until the 100% custom manufactured solution
rolls off the factory floor saving the manufacturer on all associated design,
engineering, and testing costs.

3) Eliminate Bottlenecks and Improve Efficiency:

It helps the manufacturers more efficiently (and profitably) by delivering the
services or products to their customers via a custom manufactured solution.

Key Aspect of Working with OEM:

Several companies try, few succeed, and most fail, but even those that fail become
better companies because of that experience. So, if one have ever wanted to sell
direct to OEM’s, and knew there were better companies out there, but simply don’t
want to fail on the first try, then here are some key aspects of working directly with
OEM’s.

1) OEM’s Expect Quality – Above Anything Else:

Do not bother trying to tout the quality. The fact is, OEM’s expect quality is a
guaranteed part of the equation. Company’s ability to meet their strict quality
requirements is a prerequisite to getting started. Quality is a given with OEM’s.
They expect nothing less than perfection, and rightly so. They cannot afford any
issues with their own production because of sub-par product from their suppliers.

2) OEM’s Need Manufacturers Who Use Best Business Practices:

The companies simply are not interested in companies that are not able to keep-up.
They do not have the time, or inclination, to train and teach the company the how
and why of properly servicing customers. Therefore, first and foremost, company
must have that level of professionalism that set the people apart from competition
and one must adopt best business practices. People must have that dynamic sales
and customer service team, the ability to respond to any delays, and the inventory,
and production capability, to respond to increase demand, at a moment’s notice.

3) OEM’s Need Corrective Action Taken:

Essential to making relationship work with an OEM, is company’s ability to
provide corrective action reports to resolve mistakes, and the internal process with
your quality control department to implement those corrective actions.

4) Most OEM’s want ISO-Certified Vendors:

Most people are unaware of the impact or importance of being ISO-certified. The
fact is, all ISO certification does, is to establish a set of norms and practices by
which the company will always follow. OEM’s need this because it guarantees that
when one provide them with that previously mentioned corrective action report,
that something will actually come of it. Companies set their own procedures and
policies in ISO.

5) OEM’s Need Competitive Prices and Top Tier Manufacturers:

A number of people assume that an excellent quality product equals higher prices.
In some cases, it might, but OEM’s work under the game market forces as any
other company, and simply cannot afford to have suppliers/partners who are not
competitive, and are not top tier manufacturers. One must not only provide
products on time, and in the volume they need, but at competitive prices.

6) OEM’s Need Shrewd Negotiators who will protect their Own Interests:
This is often forgotten by a number of companies. They think that they should
capitulate on each and every request made by that OEM. For some companies, they
see giving the customer everything they need, as a sign of good customer
management. It is OEM’s expect the company to be strong negotiators who will i
sure the agreements one reach with them, will be successful.

Significance of OEM:
1. Law prototype costs,

2. Short lead times once mould is procured,

3. Minimum stock levels,

4. Can be supplied finished for fast build-up,

5. No need for costly post-cast machining,

6. Highly damped structure,

7. High dynamic, static stiffness,

8. Totally stable machine structure,

9. High dimensional accuracy,

10. Good technical design service, and

11. Excellent supplier – customer relationship.

Reasons for Setting up Overseas Manufacture and Service Operations:

The benefits of overseas manufacturing and service operations are:
1) Product:
Avoiding problems due to the nature of the product, such as perishability.

2) Services:
Services that is dependent for success on local intellectual property, knowledge
and sensitivity to the local markets.

3) Transporting and Warehousing:

The cost of transporting heavy, bulky components and finished products over long
distances is reduced.

4) Tariff Barriers/Quotas:
Barriers to trade, which make the market inaccessible, are reduced.

5) Government Regulations:
Entry to some markets, such as Central and Eastern Europe are difficult unless
accompanied by investment in local operations.

6) Market:
Local manufacture and service operations may be viewed more favourably by
customers.

7) Government Contacts:
Firms are likely to be viewed more ‘ favourably if they contribute more to the local
economy.

8) Information:
A strong local presence improves the quality of market feedback.

9) International Culture:
Local presence encourages a more international outlook and ensures greater
commitment by the firm to international markets.

10) Delivery:
Local manufacture and service operation can facilitate faster response and just-in-
time delivery.

11) Labour Cost:

Production, distribution and service centres can be moved to lower labour cost
markets provided there are appropriate skills and adequate information technology
infrastructure to maintain satisfactory quality.