INTERNATIONAL MARKETING (M 607)

STRATEGIES FOR ENTERING GLOBAL MARKET:

How does an organization enter an overseas market?
The strategies or approaches adopted by a firm for entering and penetrating individual markets are often an important consideration in building global strategy and warrant more attention at this point. The firm has a choice of alternative approaches for penetrating new markets and for establishing new sources of supply. These alternatives imply different levels of commitment for the resources of the firm. They also have a time dimension and can operate as a building block or an obstacle to the achievement of long term goals. Moving from a minimum to a maximum commitment of company resources, entry strategies can be grouped into five basic categories, such as Exporting, Licensing, Strategic Alliances, Joint Vent res and !irect in"est#ent$O%ners&ip.

STRATEGIES FOR ENTERING GLOBAL MARKET

High Risk/Return

Licensing

Str te gic A!!i nc es

"#int $entu re

%irect In&est'ent

E()#rt

L#* Risk/Return E'(ORTING

Ti'e +#''it'ent
Return

This is the first stage of addressing market opportunities outside the home country. The exporter targets markets outside the home country and relies upon home country production to supply product for these markets. Exporting is the most traditional and wellestablished form of operating internationally. In export, the company produces or arranges good in the home country and sells it to the buyer of a foreign country. There are )irect and in)irect approaches to exporting to other nations. irect exporting is straightforward. Essentially the organi!ation makes a commitment to market overseas on its own behalf. This gives it greater control over its brand and operations overseas, over an above indirect exporting. a. Direct Export

" company may engage in direct exporting, that is, sales between the company and the secondcountry distributor or customer that functions as the importer. In this mode, companies undertake handling their own exports. The investment and risk are somewhat greater, but so is the potential return. The company can carry on
Afsar Uddin Ahmed, Director Commercial, Beximco Pharmaceuticals Ltd., E-mail : afs@b l.net

INTERNATIONAL MARKETING (M 607)

direct exporting in several ways. These are# ? Domestic Base Export Department of Division: "n export sales manager carries on the actual selling and draws on market assistance as needed. "fter sometimes, it might evolve into a self container export department.

Afsar Uddin Ahmed, Director Commercial, Beximco Pharmaceuticals Ltd., E-mail : afs@b l.net

? Overseas Sales Branch or Su sidiar!: "n overseas sales branch allows the manufacturer to achieve greater presence and program control in the foreign market. ? "raveling Export Sales #epresentatives: The $ompany can send home based sales representatives abroad to find business. ? $oreign Based Distri utors or %gent : %oreign based distributors would buy and own the good& foreign based agent should sell the goods on behalf of the company. . &ndirect Export " company engages in indirect exporting sells through an intermediary located in the home country. Indirect export is found in two forms, Occasional Exporting and %ctive Exporting. In occasional exporting, the company exports from time to time on its own or in response to unsolicited orders. "ctive exporting takes place when the company makes a commitment to expand exports. $ompanies typically start with indirect exporting and work through independent middlemen. The company can carry on indirect exporting in several ways. These are# ? 'igg! acking( 'hereby the company uses the existing distribution and logistics of another business for its new products. ? Domestic)Based Export *erchant( This middleman buys the manufacturer(s product and sells it abroad on its own account. ? Domestic)Based Export %gent( This agent seeks and negotiates foreign purchase and is paid a commission. ? +ooperative Organization( a cooperative organi!ation carries on exporting activities on behalf of several producers and is partly under their administrative control. ? Export *anagement( This middleman agrees to manage a company(s export activities for a fee. Indirect export has two advantages. %irstly, it involves less investment. )econdly, it involves less risk. LI*ENSING *icensing is an alternative entry and expansion strategy with considerable appeal. " company with technology, knowhow, or a strong brand image can use licensing agreements to supplement its bottom line profitability with no investment and very limited expenses. It represents a simple way for a manufacturer to become involved in international marketing. The licensor enters an agreement with a licensee in the foreign market, offering the right to use a manufacturing process, trademark, patent, trade secret, or other item of value for a free or royalty. Example# *oca+*ola, Companies can enter foreign markets on other bases. Such as $ranchising involves the organi!ation +franchiser, providing branding, concepts, expertise, and infact most facets that are needed to operate in an overseas market, to the franchisee. Management tends to be controlled by the franchiser.

Examples include !o#inos (i--a. *o//ee Rep 0lic an) Mc!olan)1s resta rants, *anagement +ontract " company can sell a management contract in which it offers to manage a hotel, an airport, a hospital or other organi!ation in return for a fee. In fact, the service provider company brings together a package of skills that provides an integrated service to the client without incurring the risk and benefit of ownership. Examples include (ac (aci/ic, 2ilton, and Apollo 2ospitals. +ontract manufacturing " contractual agreement where a firm engages local manufacturers to produce products in a specific geographic area. -ur .M/ sector is an example of contract manufacturing. Examples include RMG /or 3al+Mart. (ro) cts /or NIKE etc, "urnke! contracts are ma0or strategies to build large plants. They often include the training and development of key employees where skills are sparse for example, To4ota5s car plant in A)apa-ari. T r6e4. 1ou would not own the plant once it is handed over.

A)"antages o/ licensing ? $apital investment or knowledge or marketing strength is not re2uired. ? .oyalty income provides additional return on research and development investments already incurred. ? .educes the risk of .3 failures, the cost of designing around the licensor(s patents, or the fear of patent infringement litigation. ? -ngoing licensing cooperation and support enables the licensee to benefit from new developments. ? .educes the exposure to both government intervention and terrorism. ? "llows a firm to test a foreign market without ma0or investment of capital or management time. ? 4reempts a market for competition, especially if the licensor(s resources permit fullscale involvement only in selected markets. ? Increases protection of intellectual property rights. !isa)"antages o/ licensing ? *icensor gets limited expertise. ? *icensor creates its own competitor. ? "llows multinational corporations +M5$s, to capitali!e on older technology. (rincipal iss es in negotiating licensing agree#ents: ? The scope of the rights conveyed Involves specifying the technology, knowhow, or showhow to be included, the format, and guarantees. ? $ompensation $overing transfer, .3 , and opportunity costs. STRATEGI* ALLIAN*ES 7SA8 Strategic alliance ,S%- is a term that describes a whole series of different relationships between companies that market internationally. SA can range from loose networking relationships to very tight contractual relationships such as $o developments. )ometimes the relationships are between competitors. There are many examples including# ? S&are) #an /act ring e.g. Toyota "yago is also marketed as a $itroen and a 4eugeot. ? Researc& an) !e"elop#ent 7R9!8 arrange#ents .e.g. Exzubera by 4fi!er 3 )anofi, Aerospace ? !istri0 tion alliances e.g. i4hone was initially marketed by -6 in the 7nited 8ingdom. In India, 8imburley $lark distributes 9uggies 4ampers by using 9industan 7nilever(s distribution network since they have a common competition like 43/. ? Mar6eting agree#ents e.g. +:,. The web brouser developer ;-pera< went in to a comarketing alliance with /4 in =angladesh. +6,. ;$laracid +$lathromycin,< of "bott and "ugmentin +"moxycillin,< of =eacham were co promoted in 9. 4ylory +4eptic ulcer deseas, treatment. Essentially, )trategic "lliances are none2uity based agreements i.e. companies

remain independent and separate. JOINT VENT:RE 7JV8 " more extensive form of participation in foreign markets than either exporting or licensing is a 0oint venture with a local partner. In 0oint ventures, foreign investors 0oin with local investors to create a new company in which they share 0oint ownership and control. %orming a 0ointly owned venture might be necessary or desirable for economic or political reasons.

" 0oint venture is a combined effort between two or more business entities, with the aim of mutual benefit from a given economic activity. )ome countries often mandate that all foreign investment within it should be via 0oint ventures +such as India and the 4eople>s .epublic of $hina,. =y comparison with exporting, more control is exerted& however the level of risk is also increased. Joint Ventures tend to be e2uitybased i.e. a new company is set up with parties owning a proportion of the new business. There are many reasons why companies set up ?oint @entures to assist them to enter a new international market# ? "ccess to technology, core competences or management skills. %or example, 9onda>s relationship with .over in the :ABC>s. ? To gain entry to a foreign market. %or example, any business wishing to enter $hina needs to source local $hinese partners. ? "ccess to distribution channels, manufacturing and .3 are most common forms of ?oint @enture. The advantage of this strategy includes the sharing of risk and the ability to combine different value chain strengths, for example international marketing capability and manufacturing. ?oint ownership has certain draw backs. The partners might disagree over investment marketing or other policies. The main disadvantage of this form of global expansion is the very significant costs of control and coordination associated with working with a partner. $rosscultural differences in managerial attitudes and behavior can present formidable challenges as well. Example# +:,. The ?@ between )onyEricsons in developing advanced microchips. +6,. The ?@ between )u!uki and Maruti for manufacturing small cars. !IRE*T INVESTMENT $ O3NERS2I( The ultimate form of foreign involvement is direct ownership of foreign based assembly or manufacturing facilities. The foreign company can buy part or full interest in a local company or build its own facilities. In this mode of engagement, a company would directly construct a fixedDnon current asset within a foreign country, with the aim of assembling or manufacturing a product within the overseas market. "ssembly denotes the literal assembly of completed parts, to build a completed product. "n example of this is the ell $orporation. ell possesses plants in countries external to the 7nited )tates of "merica& however it assembles personal computers and does not manufacture them from scratch. In other words, it attains parts from other firms, and assembles a personal computer>s constituent parts +such as a motherboard, monitor, /47, ."M, wireless card, modem, sound card, etc., within its factories. Manufacturing concerns the actual forging of a product from scratch. $ar manufacturers often construct all parts within their plants. irect investment has the most control and the most risk attached. "s with any capital

expenditure, the return on investment +defined by the payback period, 5et 4resent @alue, Internal .ate of .eturn, etc., has to be ascertained, in addition to appreciating any related sunk costs with the capital expenditure. %oreign production facilities offer distinct advantages. %irst, the firm could secure cost economies in the form of cheaper labor or raw materials foreign government investment incentives, right savings and so on. )econd, the firm will gain a better image in the host country because of creates 0obs. Third, the firm develops a deeper adapt it s products better to the local suppliers and distributors, enabling it to adapt its products better to the local marketing environment. %ourth, the firm retains full control over the investment and therefore can develop manufacturing and marketing policies that serve its long term international ob0ectives. The main disadvantage is that the firm exposes its large investment to risks such as blocked or devalued currencies, worsening markets, or expropriation.

/iven these many alternative entry strategies, what are the variables that determine the best choice for a companyE %or a market seeker, the decision variable will be both external and internal to the firm. Most of the decision variables apply also to the entry decision for supply pro0ects. Example# +:,. Telenor 5orway has established its own mobile communication services in :F countries. +6, 7nilever has invested in =angladesh since :AGC(s which is now known as 7nilever =angladesh *td. Operational reasons /or setting+ p o"erseas #an /act re ? ? ? ? ? ? ? ? .educed costs of transportation .educed barriersD 2uota handicap "void /ovt. restrictions to import certain goods )ome governments demand investment with market entry e.g. $hina $ustomers sometimes prefer local manufacture e.g. 9ein! H=ritish(E /overnment contracts prefer firms contributing to the local economy Improved local market information %aster response and ?ustintime delivery

GRO3T2 E'(ANSION IN GLOBAL MARKET " company committed to growth has four basic expansion alternatives a. b. c. @ertical integration 9ori!ontal expansion 4roduct diversification

), Geograp&ical )i"ersi/ication " company committed to growth has I basic expansion alternatives# a. Vertical integration involves moving from a finished product to basic materials, or vice versa. %or a steel manufacturer, this would involve moving forward from the manufacturer of steel to the fabrication of steel products. %or the metal fabricator, vertical integration would involve moving back to the manufacturer of steel. 2ori-ontal expansion involves moving to configurations and adaptation in the product that are variations on the company(s basic line. %or example, a sled manufacturer might introduce a low priced utility model and a high priced luxury model, thus expanding the line from one basic, medium priced sled to three. (ro) ct )i"ersi/ication involves moving into an entirely new product technology area via ac2uisition.

b.

c.

d. Geograp&ical )i"ersi/ication or t&e extension of existing products to new geographic markets.