FACTORS AFFECTING THE SELECTION OF ENTRY MODE

EXTERNAL FACTORS INTERNAL FACTORS

Market size Market growth Govt. regulations Level of competition Physical Infra structure Level of risk political, economical ,operational Production and shipping cost

Company objectives Availability of company resource Level of commitment Internal experience Flexibility

External Factors
MARKET SIZE:  Large market size justify the mode of entry with long term commitment requiring higher level of investment like wholly owned subsidiaries or equity participation  To take advantage of market size number of Indian companies are in the process of committing more resources to the Chinese market  Ex Ranbaxy entered Chinese market in a joint venture and emerged as a market leader with the brand Cifran

External Factors
MARKET GROWTH  Most of established markets likeUSA,Japan,Europe has reached a point of saturation for consumer goods such as automobiles ,consumer electronics like TV, fridge, washing machine etc so the growth in these countries is showing declining trend.  Firm invests in markets with high growth potential such as China ,India ,Thailand ,Indonesia etc .these are called as emerging markets

External Factors
GOVERNMENT REGULATIONS :  The selection of market is greatly influenced by the legislative framework of the overseas market  Govt in gulf countries has made it compulsory for foreign firms to have a local partner.  UAE is a lucrative market for Indian firms but most firm operate there with a local partner  Trade barriers such as ecological regulations affect mode of entry .this major reason for increased FDI in Mexico which is part of NAFTA(north American free trade agreement)  To cater US market . Japanese automobile firm set up their units in the European Union mainly due to high tariff on automobiles that foreign firms were forced to set up manufacturing units especially in the automobile sector in china

External Factors
LEVEL OF COMPETITION Presence and involvement of competition in an over seas market is crucial factor in deciding on entry mode . Ex In auto companies setting up their operations in India and other emerging markets so as to effectively respond to global competition . PHYSICAL INFRA STRUCTURE Level of development of infrastructure like roads railways, metros , telecommunications, FI, and marketing channel is a pre condition for a company to commit more resources to an overseas market Countries like Singapore, Dubai, Hongkong see major investment only because of infrastructure development

EXTERNAL FACTORS
LEVEL OF Risk There are 3 types of risks 1. Political risks :  Political instability and turmoil dissuades the firms from pouring in more resources to the market .  Companies invest more in countries with a stable Govt. and transparent legal systems  The political system in developed countries like USA, UK , Japan , Australia is more less stable  Political system is highly instable in countries like Iraq,Pakistan,Fiji, Argentina , Brazil etc

External Factors
2.ECONOMIC RISKS :

 Economic risk arise due to volatility of exchange rates of the target markets currency , upheavals in balance of payment situations that may affect the cost of other inputs for production , and marketing activities in foreign market  International companies find it difficult to manage operations in markets where inflation is very high .  As seen in countries like Brazil , Argentine so most Companies prefer to enter these markets by way of licensing and franchising rather than equity participation.  Firms invest more in those countries with higher economic stability

External Factors
OPERATIONAL RISK : If the marketing system in an over seas country is similar to that of the firms home country, the firm has a better understanding of operational problems in the foreign market in question Ex. The absence of organized retailing system in India provides Indian exporters a strategic edge when operating in other developed countries , which do not have organized retailing system

External Factors
PRODUCTION AND SHIPPING COSTS Markets with substantial cost of shipping as in case of low value high volume goods may increase the logistics cost . The increased chipping cost may not only be due to the longer distance but also because of lack of availability if competitive shipping lines as I case of shipping goods from India to most African and Latin American countries

INTERNAL FACTORS
COMPANY OBJECTIVES:

y Cos entering international market with an reactive

approach to international marketing opportunities y In such cases Co. receives unsolicited orders from acquaintance ,firms and relatives based abroad and they attempt to fulfill these export orders y Strategic objective of proactive co make them enter into international markets through investment modes of entry

INTERNAL FACTORS
AVAILABILITY OF COMPANY RESOURCES
 Entering IM need substantial commitment from

financial and human resource and therefore the choice of an entry depends on the strength of financial strength of the firm. Ex . Indian firms with good financial strength have entered the International market by way of wholly owned subsidiaries or equity participation

INTERNAL FACTORS
LEVEL OF COMMITMENT : WRT market potential , the willingness of the company to commit resources in a particular market also depends on the way the co is willing to perceive and respond to competitive forces . Companies need to evaluate various investment alternative for allocating scare resource INTERNATIONAL EXPERIENCE : A co well exposed to the dynamics of the International marketing environment would be at ease when making a decision regarding entering IM with a highly sensitive mode of entry such as JV and wholly owned subsidiaries

INTERNAL FACTORS
FLEXIBILITY : y Companies should keep in mind exit barriers when entering international markets y A market which presently appear attractive may not necessarily continue to be so say next 20 years. y There could be changes in political, legal, structures and changes in customer preferences so markets may be favorable now may show exit over a period of time so need to be approached by way of strategic alliance

The approach to international expansion a company chooses based on desired control and on the risk it can afford .

Indirect exporting
y An export entry mode where by a company sells its

products in the company's home country to intermediaries who in turn sell the product overseas y Middle man can be used such as export management companies ,trading companies, agents or brokers y These manage distribution operations in Int.markets Eg. Merchant exporter

Cooperative exporting/piggy backing/mother Henning

y Using the distribution system of exporters with

established systems of selling abroad who agree to handle the export function of a non competing company on a contractual basis y Such companies are paid on commission or are charged a discount price for the product. y They are larger companies with extensive experience in and knowledge of target international markets .

PIGGY BACKING
y In PIGGY BACKING the company exporting is known as rider with inadequate experience of operating marketing channels and uses a foreign company which has an established distribution network in the foreign markets known as carrier

Direct Export
y An export entry mode where by a firm handles its

own exports usually with the help of an in-house exporting department. y Such companies have more control over the marketing mix in the target market. y They make sure that the wholesale and the retailer observe the companies marketing policies ,charging the suggest sales price , offering the appropriate promotions and handling customer requests promptly and satisfactorily.

Direct exporting
 Companies bear the cost involved in selecting and

monitoring the different intermediaries involved in distribution, freight forward, shipping lines , insurers , and retailers.  Co bears the cost for marketing service providers, such as consultants , marketing research and advertising companies .  One ex for opening new opportunities for direct exporting is internet .  Some co do catalogue retailing and dot.com companies , like Amazon etc

Licensing
y An international entry mode that involves a licensor, who shares the brand name, technology and know how's with a licensee in return for royalties . y Licensor : the owner of a product license who agrees to share know how's , technology , and brand name with the licensee in return for royalties . y Licensee: the purchaser of the license who pays royalties to the licensor for the rights to use the licensors technology , know how's and brand name

Licensing
Licensing presents more risk to the Co. but offers more control than exporting . It involves a licensee and a licensor The licensor offers know how's , shares technical information, and often shares a brand name with the licensee The licensee performs following functions :  Production of the licensors products covered by rights  Marketing these products in the assigned territory  Paying royalties to the licenser for using the intellectual property

Licensing with out name

The product mfged under license are of highest quality When quality cannot be maintained it is desirable for products produced under license not to carry the licensors brand name Example  In Italy fiat granted licensee to Avto VAZ Russia s largest automobile manufacturer lada.  France Renault granted license to build Dacia brand automobiles in Romanian

Licensing advantages
closed or may have high entry barrier  In the event of natural disaster or Govt. takeover , the licensor licensing without name incurs only loss of Royalties  The licensor that permits the use of the name may suffer loss of reputation in the short term if the product s are mfg without licensors supervision / if they do not uphold licensors standard .
 It is lower risk entry mode  It permits the Co access to market that may be

Licensing advantages
 It facilitates rapid penetration in international market for technology intensive products and process.  Provides access to markets with high level of tariff and non tariff barriers .  It reduces political and economical risk associated with international markets and therefore provides opportunities to venture into more sensitive markets  It helps the international licenser to rapidly expand into international markets and amortize the expenditure incurred on R&D  In case of developed and developing countries where forged products are in high circulation in the market , licensing helps in curtailing the duplicate products market.

Contractual entry mode

y A company may enter international markets using synergistic effect of a partner firm and make use of its resources . y This is mutually beneficial for both the firms as it provides them access to new technology and markets . y Firms having high tech products or +manufacturing facilities but no access to foreign market may use a foreign partner that is well established and has got a strong distribution and marketing network in the foreign market Example: y Tata tea ltd which is one of largest tea companies in the world now had entered into contractual entry mode with Tetley group in UK which had strong presence in Europe, US and Australia

Consortia
y Consortia involves 3 or more companies y Ex consortia involves some companies with a

substantial percentage of Govt. ownership is Air Bus Industries .airbus is an international consortium involving France (Aerospatiale with a 37.9 percent ownership),the UK (British aerospace with a 20 % ownership), Germany (Daimler Chrysler DSA subsidiary , with a 37.9 percent ownership ) Spain with 4.2 % ownership

Wholly owned subsidiary

y The entry mode that affords the highest level of

control and present the highest level of risk to a company , it involves establishing a new company that is a citizen of the country where the subsidiary is established. y Co can over come some of the disadvantage offered by partnering with other firms by setting wholly owned subsidiaries

Wholly owned subsidiary

y Assumptions of wholly owned subsidiary y 1. The company can afford the costs involved in

setting up a WOS. y 2. The Co is willing to commit to the market in long term y 3. The local Govt. allows foreign companies to set up WOS on its territory.

Wholly owned subsidiary

y Companies can develop its own subsidiary ,

referred to as Green field, which represents a costly proposition , or it can purchase an exisisting company through acquisitions or mergers y Govt have been de socializing services and industries , rapidly privatizing industries that were formerly Govt owned or operated y Ex opportunities in areas like telecommunications ,health care ,energy etc

Wholly owned subsidiary

Advantages y Provide relative control of company operations in the target market . y Control on how to handle revenue and profits y It also carries greatest level of risk . Ex y In case of Daimler Chrysler , Daimler found that Chrysler was not performing up to the par and quickly proceeded to restructure , weeding out the former Chrysler employees .

FRANCHASING
it is the service industry equivalent to licensing . Ex service sectors like healthcare, personal wellbeing ,education training , specialty retailing etc
y Franchising is a mode of entry for the service industry and

y The FRANCHISER known as home company gives the

FRANCHISEE or overseas company intellectual property and other assistance over an extended period of time OR y the right to use its brand name and all relate trademarks and its business know how's such as secret recepies and customer interfacing technique, the franchisor may also provide the franchisee with advertising and sales promotion support all in return for royalties

FRANCHASING
y There are 2 parties involved like licensing Franchiser and franchisee . y Franchisee acquires the right to market the producers products and services in a prescribed fashion using the franchisers brand name , processing and production methods and marketing guidelines. y He pays royalties in terms of money y Franchiser- who gives the franchisee the right to use brand name and all related trademarks and its business know how's such as secret recepies and customer interfacing technique, in return for royalties.

FRANCHASING ADVANTAGES
y Franchising is a form of licensing where in y y

y y

transfer of IPR takes place . It is a low cost and low risk mode of entry It provides firm opportunity to rapidly penetrate overseas where it has little market knowledge and strength Transfer of knowledge is an on going process Co exerts high control franchisee operations which ensures uniform quality and service standards across markets

DISADVANTAGE -FRANCHASING
y The franchisers some times find it difficult to coordinate and y y y y y y

control a large number of franchises In many developed and developing countries the concept of franchising hardly exists . And international marketers find it difficulty to identify and select franchising partners In major countries franchising associations and their websites provide useful service information Ex McDonald's restaurants in France often found a quick copy cat setting up around the corner Ex McDonalds , Carrefour hypermarket ,pizza hut , KFC ,Benetton are international franchising Benetton- the franchiser need to achieve minimum sales target follow marketing guide lines , and must adhere to standard shop layout. However the franchiser are not required to pay any franchising fees .

JOINT VENTURE
y When a firm is willing to take complete control of its

overseas operations in the international markets , it opts for equity participation with an over seas firm y A JV involves more than 2 firms in equity participation y In JV the 2 or more companies involved provid a complementary advantage for formation of a new company . y Thus in JV the participating company contribute their complementary expertise and resources

JOINT VENTURE
y The basic difference between a JV and strategic alliance is that unlike JV a SA has no equity participation from 2 firms . y Reasons for forming JV : y To over come FI barriers specially in Developing and least developed countries . y To manage the emerging new opportunities with complementary technology or management skills provided by JV. y To over come operational barriers i.e. establishing contacts with Govt and local officials y To achieve competitive advantage in global operations with low investments

JOINT VENTURE BENEFITS

y Provide access to international markets with

high tariff and other import barriers y Provide access to the strengths of local firms including their supply chain and distribution channels in foreign markets. y Provide instant access to operational knowledge so that company has perception of being local in foreign markets y Reduce political and economic risks

JOINT VENTURE BENEFITS

y Provide opportunities to Indian firm with strength

in technical and process know how's to enter international markets y Provide access to foreign capital market. y Facilitate shifting of manufacturing operations to low production countries. y Provide greater control over production and marketing functions y Facilitate firms to strengthen their competitive position in International markets

JOINT VENTURE DISADVANTAGES

yGreater risk as compared to modes

of entry without equity participation. yConflict between partners may adversely affect a joint venture s performance

STRATEGIC ALLIANCES
All joint ventures and licensing and franchising agreements are considered to be strategic alliances between companies attempting to reach joint corporate and market related goals. This address to those formats which are short term in nature and that do not entail same level of commitment as the previous categories Such alliances crop up frequently and have various forms and degree of alliance They vary from a contract manufacturing agreement that requires the contracting firm to provide raw material and training to the contracting factory in return for production that could last for 2yrs for an exchange of loyalty points between companies

y An Indian company can acquire a foreign company and all its resources in a foreign market. y Acquisition provides speedy access to the resource of a foreign company such as skilled manpower ,the Co s products and brand ,and its distribution channel . y Opportunistic JV often happens with a acquisition of a weaker firm with a stronger partner

ACQUISITION

Ex of acquisitions y Tata motors with Daewoo ,Korea worth 118 m $. y Reliance with flat telecom in Bermuda worth 207 m US $ y Wipro with nerve wire USA worth 18.7 million $

TYPES OF STRATEGIC ALLIANCES

y 1.MANUFACTURING ALLIANCE y 2.MARKETING ALLIANCE y 3. DISTRIBUTION ALLIANCE

1.MANUFACTURING ALLIANCE
y A no equity relationship between 2 firms , in which one

firm handles the others manufacturing or some aspect of the manufacturing process

y M.A covers many types of alliances from contract y y y y

manufacturing to technological ,engineering, and Rand D alliances Ex MA between the US company Motorola Inc. and Singapore Flextronics International ltd . Flextronics has manufacturing contracts for infrastructure and cell phones Porsche has engaged in different type of technical alliance with Harley Davidson, helping to develop low noise ,low emission motorcycles . Porsche is helping Harley Davidson to develop its water cooled revolution engine

2.MARKETING ALLIANCE
y A no equity relationship between 2 firms , in

which one firm handles the others marketing or some aspect of the marketing process
y Marketing alliance focus on all aspects of

marketing y Ex Opel the German subsidiary of US auto manufacturers general motors signed a 2 year contract of to market its automobile to 6.5 million American online subscribers in Germany

3. DISTRIBUTION ALLIANCE
y A no equity relationship between 2 firms , in

which one firm handles the others distribution or some aspect of the distribution process y Ex mitsui and Mitsubishi has set up distribution alliances with coca cola in Japan , bottling and distributing all coke products in the market