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Ashutosh Sharma Sakshi Madan
Basic foreign expansion entry decisions
A firm contemplating foreign expansion must make
Which markets to enter??
When to enter these markets?? What is the scale of entry??
o o o
Which is the best mode of entry??
Which Market?? • Different long-run profit potential for firms o o o Size of market Purchasing power (present wealth) Future wealth • Benefits cost & risks trade off– rank markets o o o Future economic growth rates Free market system & country’s capacity for growth Stable and developing markets without upsurge in inflation rates or private-sector debt • Value an international business can create in a market o o o o Suitability of product for market Nature of indigenous competition Not widely available & satisfies an unmet need Greater value translates into an ability to charge higher prices & build sales volume more rapidly .Basic Market Entry Decision .
Basic Market Entry Decision – Timing of Entry?? • • Early entry .Firm enters foreign market before other foreign firms First mover advantage o o o Ability to preempt rivals & capture demand by establishing strong brand name Build sales volume and ride down the experience curve with a cost advantage Create switching cost that tie customers into products & services • o First mover disadvantages – Pioneering costs o Time & effort in learning the rules of the game o Mistakes due to ignorance o Liability of being a foreigner o Costs of promoting & establishing a product – educating customers (KFC in China -> benefit to McDonald’s) .
Mode of Entry .
Disadvantages: May be difficult to build market share. how competitors might react Can limit strategic flexibility Small Scale Entry: Advantages: Time to learn about the market. Difficult to capture first-mover .Scale of Entry?? Large scale entry Requires commitment of significant resources & implies rapid entry Strategic commitment • Decision that has long term impact & is difficult to reverse (entering market on large scale) • Change the competitive playing field & unleash number of changes – e. Limits company exposure.g.
Which Foreign market entry mode? .
Matsushita/VCR. Samsung/Chips) o Disadvantages: • • • • • • Susceptibility to trade barriers Logistical difficulties Less suitable for service products Susceptibility to exchange-rate fluctuation Not appropriate if other lower cost manufacturing locations exist High transport costs can make exporting uneconomical especially bulk products .EXPORTING • • • The commercial activity of selling and shipping goods to a foreign country Indirect Exporting Export management companies Direct Exporting • • • • • Firms set up their own exporting departments Advantages: Easy implementation of strategy Less investment abroad which helps small firms also to enter international business Minimal risks Casual international marketing effort Firm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV.
CONTRACTUAL AGREEMENTS are long-term. non-equity associations between a company and another in a foreign market Licensing Contract manufacturing CONTRACTUAL AGREEMENTS Franchising Management contracting .
shares technology.LICENSING • An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return. the licensor receives a royalty fee from the licensee. • • • Offers know-how. permits access to markets Licensor and the licensee Benefits: o Appealing to small companies that lack resources o Faster access to the market o Rapid penetration of the global markets Caveats: o Other entry mode choices may be affected o Licensee may not be committed o Lack of enthusiasm on the part of a licensee • . licensee pays royalties. lower-risk entry mode. and shares brand name with licensee.
FRANCHISING • Franchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee. but also insists that the franchisee agree to abide by strict rules as to how it does the business • • Longer-term commitments Benefits: o o o Overseas expansion with a minimum investment Franchisees’ profits tied to their efforts Availability of local franchisees’ knowledge • Caveats: o o Revenues may not be adequate Availability of a master franchisee .
raw materials. Benefits: o o o o Labor cost advantages Savings via taxation. lower energy costs.Contract manufacturing • • • Contract manufacturing is a process that establish a working agreement between two companies. As part of the agreement. and overheads Lower political and economic risk Quicker access to markets • Caveats: o o Contract manufacturer may become a future competitor Lower productivity standards . one company will custom produce parts or other materials on behalf of their client.
• It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company when foreign government actions restrict other entry methods. Disadvantages: • • • • • Loss of control Time delays Loss of flexibility Loss of quality Compliance .Management contracting • A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee. Advantages: • Management contracts are often formed where there is a lack of local skills to run a project.
Licensing. Joint venture. consortia etc Firms enter SIAs for several reasons: o o o o Opportunities for rapid expansion into new markets Access to new technology More efficient production and innovation Reduced marketing costs o o Strategic competitive moves Access to additional sources of products and capital .STRATEGIC ALLIANCE • • Cooperative agreements between potential or actual competitors A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective • • • SIAs are sought as a way to shore up weaknesses and increase competitive strengths.
transfer pricing. ownership of critical assets like technologies and brand names • Drivers Behind Successful International Joint Ventures : o o o o Pick the right partner Establish clear objectives from the beginning Bridge cultural gaps Gain top managerial commitment and respect o Use incremental approach .• • Joint Ventures Cooperative joint venture Equity joint venture • Benefits: o o o o o Higher rate of return and more control over the operations Creation of synergy Sharing of resources Access to distribution network Contact with local suppliers and government officials • Caveats: o o o Lack of control Lack of trust Conflicts arising over matters such as strategies. resource allocation.
• Consortia are developed to pool financial and managerial resources and to lessen risks.Consortia • Consortia are similar to joint ventures and could be classified as such except for two unique characteristics: o o They typically involve a large number of participants They frequently operate in a country or market in which none of the participants is currently active.Strategic alliances. .
It can acquire an established firm in the host nation. assets sizes and venturing experience • A shared vision on goals and mutual benefits . logistics. and manufacturing technology. plant layout.WHOLLY OWNED SUBSIDIARY • • The firm owns 100% of the stock The firm can either set up a o Green-field venture:. and markets • Similar cultures.Offer the company more flexibility than acquisitions in the areas of human resources. technologies. o OR o Acquisitions :. • Alliances between partners that are related in terms of products. suppliers.
Advantages: • Reduces the risk of loosing control over technological competence • Tight control over operations • Helps to achieve location economies Disadvantages: • Larger commitment and risk • Most costly method • Risk of national expropriation .
2. Then licensing or joint venture OK Management Know-How Franchising. Technology advantage is transitory. Venture is structured to reduce risk of loss of technology. except: 1.Selecting an entry mode Technological Know-How Wholly owned subsidiary. subsidiaries (wholly owned or joint venture) Combination of exporting and wholly owned subsidiary Pressure for Cost Reduction .
Exit Strategies • • Risks of exit: o Reasons for exit: o o o o o o o Sustained losses Volatility Premature entry Ethical reasons Intense competition Resource reallocation o o Fixed costs of exit Disposition of assets Signal to other markets Long-term opportunities • Guidelines: o o o Contemplate and assess all options to salvage the foreign business Incremental exit Migrate customers .
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