INTERNATIONALIZATION -1

Chapter 6
 MODES OF ENTRY

1. Exporting

- Direct
- Indirect

2. Contractual entry modes

- Licensing
- Franchising
- Contract manufacturing

3. Investment entry modes

- Joint venture
- Wholly owned subsidiaries
 DIRECT EXPORTING

TORO

Agents/distributors in foreign markets

(Sales & distribution)

Characteristics
Financial risk Low – no investment
Speed of entry Fast
 FRANCHISING

It is an agreement between 2 parties- franchisor & franchisee

Franchisor allows a franchisee to use ‘brand’ & operate a ‘business model’ in

exchange for a fee.

Characteristics
Financial risk Low – no investment
Speed of entry Fast
 MCDONALD
BUSINESS FORMAT FRANCHISING

McDonald US

Use of brand
+ Fee*
Business model

Franchisees
Invest in stores + manage stores

Franchisor revenue model

An upfront fee at time of signing agreement
Royalty paid every month as % of sales
 APPLE
PRODUCT FRANCHISING

Exclusive Manufacturer- dealer relationship

Franchisee sells product of franchisor in a given area

Franchisor revenue model

Sale of product to franchisee
 CONTRACT MANUFACTURING
Or MANUFACTURING FRANCHISING

Objective
To produce in foreign market without capital investment

Coke Bottlers
syrup

know how

Each has an area

Difference between contract manufacturing model & outsourcing model?

Where goods are used

CM/Mfg. franchising Restricted to a market

Outsourcing model Can be used in any market

 LICENSING

Licensor licenses Intellectual property to licensee to use for a period of time in

exchange for a fee

Brand owner Wrangler USA

Manufacturer Ace turtle – 10 year contract
 JOINT VENTURES

A partnership between 2 independent companies to combine their resources

& create a third company to achieve a certain objective.

Partners share investment & profit in ratio of their equity ownership in the
third company

Starbucks: A Tata alliance

Starbucks Tata
50% 50%

Money money
Separate
company

Characteristics
Financial risk High – investment model
Speed Slow
 CONDITIONS

1. REQUIRES COMPLEMENTARY STRENGTHS

Foreign partner – technology/expertise
Indian partner – understanding of Indian market

2. BOTH REQUIRE EXPANSION OPPORTUNITES

Foreign partner – wants to expand international coverage
Indian partner – gets a good business opportunity

3. BOTH NEED TO REDUCE RISK

WHOLLY OWNED SUBSIDIARY
(100% owned)

Unilever

HUL
factories

Indian Customers
 QUESTION

Where to locate in the country?

Stand-alone site
Special economic zone
Industrial Clusters
 SPECIAL ECONOMIC ZONES
(Also called export zones – free trade areas)

Definition
Geographical region within a country where regulations are more liberal than
the normal regulations

Objective
To attract MNCs to locate – thereby increasing exports

providing an attractive environment

Some Benefits

1. Duty free imports of raw material

2. No taxes on finished products ( eg excise/sales tax).
3. Exemption from income tax for 5 years
4. A location close to ports
 INDUSTRIAL CLUSTERS

Definition

Geographic concentration of interconnected firms & institutions in a field

Eg-Wine cluster of California

‘Competing’ Wineries + grape orchards + barrel suppliers + machinery

suppliers + wine research institute + university

Types of clusters

Specialized ‘Single industry’ clusters

Diverse ‘Multi industry’ clusters
 BENEFITS OF CLUSTERS

Cost of transport Matching of labor

reduces Higher productivity

Exchange of ideas

More innovation

Result

Competitiveness In cluster MSE firms become more competitive

Development Cluster attracts new firms
 QUESTION

National International
expansion vs expansion

Q- Is it the same?

- Cultural differences
- Geographical distance
 WALMART

1. Walmart International sells in 24 countries – under 50 names & sales

are 18% of total.

2. Going international allows them to show capital markets increasing

sale/profit – so that its share price grows. In addition, US market is
saturated as it contains 4% of global population – it needs to go to the
remaining 96%.

3. Where to go first – Europe, north & South American continent or Asia?

It cannot go everywhere simultaneously due to lack of resources. This is
a story of how it expanded in a few markets?

4. Europe was saturated – already had strong competitor Carrefour-

would require stealing share. Asia was geographically & culturally
distant- would require market learning. It was decided to focus on
American continent first as they were geographically the closest.

5. Canada- was a mature market- adding new stores would intensify

competition – unattractive to go for greenfield operations. It was
culturally similar – no need for learning. Walmart entered by acquiring
a poorly performing retail chain- converted it into a subsidiary. Using
its US success formula of everyday low price & efficient distribution – it
turned it around. Currently 2nd largest retailer.

6. Mexico – culturally different & learning required. It entered with 50-50

joint venture with CIFA Mexico’s largest retail chain. Currently largest
supermarket chain in Mexico.
7. China- It researched China for 4 years and entered with a joint venture
partner- Shenzhen international. They changed their format to smaller
shops- focused on ‘local merchandise mix’ consisting of fresh
ingredients & live fish- frogs – turtles. Currently 4th largest &
struggling.

8. Germany- It acquired a poorly performing retailer – converted it into a

subsidiary- introduced the US success formula. Unfortunately, the
formula did not work – after 9 years & loss of $ 1 billion it exited
German market.

9. QUESTION

- What was its market selection strategy?

- Which entry mode to use?
 STAGE MODEL

Gradual & slow

Country by country

What should be the sequence?

Enter geographically close- culturally similar markets

Then enter geographically distant – culturally similar markets

Then enter geographically distant -culturally dissimilar market

 BORN GLOBAL FIRMS
Early & fast

Many/all countries at a time

Why?

1. They have internet technology- it makes it possible

Eg- Amazon, uber, Netflix etc

2. Home markets insufficient to meet their capacity

Eg-Australian mines, Aramco

3. Global ambitions
Eg- BYD – Chinese electric vehicle mfg.