final modes of entry into an internataional mkt
TRANSCRIPT
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Let Your Mind Start a Journey Through a
Strange New World.
Leave All Thoughts Of The World You Knew
Before.
Let Your Soul Take You, Where You Long To Be
Close Your Eyes, Let Your Spirit Start To Soar,
And Youll Live As Youve Never Live Before.
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PRESENTED BY:-
SANJAY YADAV
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Growth
Profitability
Achieving economies of scale
Risk spread
Access to imported inputsUniqueness of product or service
Marketing opportunities due to life cycles
Spreading R & D costs
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There are some basic decisions that the firm must take
before foreign expansion like:
which markets to enter
when to enter those markets
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The choice is based on nations long run profit
potential.
Look in detail at economic and political factors
which influence foreign markets.Long run benefits of doing business in a country
depend on following factors:-
Size of market (in terms of demographics)
The present wealth of consumermarkets(purchasing power)
Nature of competition
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It is important to consider the timing of entry. It is saidthat..
Entry is early when an international business enters aforeign market before other foreign firms and late
when it enters after other international businesses. The advantage is when firms enters early in the foreign
market commonly known as first-mover advantages
First mover advantage:-
Its the ability to prevent rivals and capture demand byestablishing a strong brand name.
Ability to build sales volume in that country. So thatthey can drive them out of market.
Ability to create customer relationship
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Exporting
Licensing
Franchising
Turnkey Project
Acquisitions
Amalgamation
Merger
Takeovers
Joint Venture
Wholly Owned Subsidiary
Strategic Alliances
Management Contracts
Free Trade Zones
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A function of international trade whereby goods produced in
one country are shipped to another country for future sale or
trade.
The sale of such goods adds to the producing nation's gross
output. If used for trade, exports are exchanged for other
products or services.
Exports are one of the oldest forms of economic transfer,
and occur on a large scale between nations that have fewer
restrictions on trade, such as tariffs or subsidies.
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Need for limited finance
Less Risks
Motivation for exporting
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Indirect exporting
Direct exporting
Intracorporate transfers
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In this mode of entry, the domestic manufacturer
leases the right to use its intellectual property (i.e.)
technology, copy rights, brand name etc to amanufacturer in a foreign country for a fee.
Here the manufacturer in the domestic country is
called licensor and the manufacturer in the foreign
is called licensee.
A licensee ordinarily pays a royalty to the licensor.
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Low investment on the part of licensor.
Low financial risk to the licensor
Licensor can investigate the foreign market
without much effort on his part.
Licensee gets the benefits with less investment on
research and development
Licensee escapes himself from the risk of product
failure.
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It reduces market opportunities for both.
Both parties have to maintain the product quality
and promote the product. Therefore one party can
affect the other through their improper acts.Chance for misunderstanding between the parties.
Chance for leakages of the trade secrets of the
licensor.
Licensee may develop his reputation.
Licensee may sell the product outside the agreed
territory and after the expiry of the contract.
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LICENSOR
Leases the right to use
its intellectual propertyEarns new revenues with
relatively low investment
LICENSEE
Uses the intellectual
property to create
products for local sale
Pays a royalty back to
the licensor
Basic Issues:1. Set the boundaries of the agreement
2. Establish compensation rates
3. Agree on the rights, privileges, and constraints
4. Specify the duration of the agreement
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Trade marks
Operating System
Products
Continuous support system like advertising,employee training, reservation services and
quality assurances program etc.
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Low investment and low risk
Franchisor can get the information regarding the
market culture, customs and environment of the
host country. Franchisor learns more from the experience of the
franchisees.
Franchisee gets the benefits of R& D with low
cost. Franchisee escapes from the risk of product failure.
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International franchising may be more complicated
than domestic franchising.
It is difficult to control the international franchisee.
It reduce the market opportunities for both.
Both the parties have the responsibilities to
maintain product quality and product promotion.
There is a problem of leakage of trade secrets.
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A turnkey project is a contract under which a firm
agrees to fully design , construct and equip amanufacturing/ business /services facility and turn the
project over to the purchase when it is ready for
operation for a remuneration.
The form of remuneration includes. A fixed price
payment on cost plus basis (i.e., total cost incurred plus
profit)
Example : Once Indonesian Govt during 1974 invited
global tenders for construction of sugar factory.
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ACQUISITION
AMALGAMATION MERGER
TAKEOVERS
JOINT VENTURES
STRATEGIC ALLIANCES
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Acquisition is acquiring or purchasing an
existing venture. It is one of the easy
means of expanding a business by
entering new markets or new productareas.
An entrepreneur must be careful is
structuring the payment so that he wouldnot be financially overburdened.
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Tata has recently acquired Jaguar, Land Rover
and Fiat Motors
Videocon acquired Thomson SA of France at
about US $ 290 million.Ranbaxy Labs at a deal of US $ 324 million
acquired Romania based Terapia SA.
Tata Steel acquired UK based Corus Group at adeal value of US $ 12 million.
Fortis Healthcare acquired Hong Kong's Quality
Healthcare Asia Ltd for around Rs 882 Crore
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The company immediately gets the ownership and
control over the acquired firms factories,
employee, technology, brand name and distribution
networks.
The company can formulate international strategy
and generate more revenues.
The method of expansion cost lower than other
methods.The knowledge, skill and expertise of existing
employees will prove to be very beneficial to the
company.
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Acquiring a firm in a foreign country is a complex
task involving bankers, lawyers regulation,
mergers and acquisition specialists from the two
countries.
This strategy adds no capacity to the industry.
Sometimes host countries impose restrictions on
acquisition of local companies by the foreign
companies.Labor problem of the host countrys companies are
also transferred to the acquired company
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Removal of competitor
Reduction of the Companys failure through
spreading risk over a wider range of activities.
The desire to acquire business already tradingin certain markets & possessing certain
specialist employees & equipments.
Obtaining patents, license & intellectualproperty.
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Amalgamation is a restructuring phenomenon in which two or more
companies are liquidated and a new company is formed to acquire
business. In simpler terms, it means that a new company is formed that
buys the business of minimum two companies.
The new company or the acquiring company is known as the
amalgamated company. It acquires the assets and liabilities of the other
companies known as amalgamating company. Commonly, such
companies are also referred as target companies or merging companies.
Amalgamations are considered to be a safe route for sick units who want
to save their existence. Many other companies facing possible bankruptcy
also opt for amalgamations.
Similarly, cash-rich firms that have lot of liquid assets but no profitable
business opportunities aim for it as a long-term investment.
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The most challenging task in any amalgamation is to create a sense of co-
operation among the employees of different amalgamating companies.
Ultimately, the success of any venture depends upon people handling it.
NOTE: In India, mergers and amalgamations are used interchangeably in legal
parlance. However, they are an entirely different accounting treatment. It is a
complicated procedure involving lot of legal, tax, and accounting
considerations Therefore, one need to be very careful while evaluating anamalgamation proposal.
Tax treatment is an important aspect of amalgamation. According to the
Income Tax Act, the amalgamating companies are not liable to pay the capital
gain tax levied on them following their liquidation. The incidence of tax fallson the amalgamated company. Moreover, all expenses related to
amalgamation are not tax-deductible.
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Hindalco targeted Canada to acquire Novelis at US $
5982 million.
Reliance Power and Reliance Natural Resources
combined their operations at a deal of US $11 billion.
ICICI Bank acquired Bank of Rajasthan at about Rs
3000 Crore.
Wipro bought US based Info Crossing at US $ 600
million.
GTL Infrastructure acquired Aircel Towers at US $ 1.8
billion.
Source:http://amalgamation.in/amalgamation-
meaning.htm
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A merger happens when two firms agree to go
forward as a single new company rather than
remain separately owned and operated.
This kind of action is more precisely referredto as a "merger of equals". The firms are often
of about the same size. Both companies' stocks
are surrendered and new company stock is
issued in its place.
TYPES OF MERGERS:
Vertical merger
Horizontal merger
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Vertical merger involves integration of two companiesproducing intermediate products for the same finishedproduct.
Typically, it involves purchase of business of suppliers ordistributors that provide raw materials or semi-finished
goods for the production of a single good. The main aim is to shorten the supply chain and increase the
profit margins. For instance, a two-wheeler manufacturercan purchase a tire company.
Vertical mergers help firms in the same industry to create amonopolistic situation by restricting the supply of inputs toother players, or by providing the inputs at a very high cost.
Moreover, it reduces the dependence on suppliers therebygiving more autonomy to the manufacturing firm.
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Horizontal merger involves a merger between two
firms producing similar goods and services in a market. For instance, two car manufactures, can merge their
business for greater benefits. Presently, most of thecountries have open economies. This has led to cut-throat competition among companies for survival in the
market. Horizontal mergers, therefore, is a strategic initiative
taken by firms to combine their market share to sustainand grow in the market.
Horizontal mergers help firms grow in size, enjoyeconomics of scale, and fight competition from otherfirms.
Such mergers can also be of small companies.
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A company takeover generally refers to the purchase of a
company, partially or wholly, by another company known asthe acquirer.
The main objective of the acquirer is to exercise controlover the management of the target company.
Practically, the acquirer struggles to buy approximately 30percent of the equity held by major shareholders. Theremaining equity holders are too small to refute thetakeover, and they easily surrender their share.
Like other forms of corporate restructuring, takeovers alsohave pros and cons.
On one hand, they are considered to be positive because
they improve the working of management that leads toincreasing productivity, profit margins, and ultimatelymaximizes earnings per share.
On the other hand, it is argued that takeovers loweremployees' morale. They refuse to co-operate and accepttheir new boss.
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When two or more firms join together to create a new
business entity that is legally separate and distinct from its
parents.
It involves shared ownership.
Various environmental factors like social, technological,economic and political encourage the formation of joint
ventures.
Joint Ventures are not permanent.
Example : Hero Honda:- was an joint venture but due to itstemporary nature it is no more a joint venture. Now Honda
is Honda and Hero is Hero moto corp.
Another example is: The most famous joint venture i.e.,
Wall Mart and The Bharti Group.
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Joint venture provides large capital funds suitable
for major projects.
It spread the risk between or among partners.
It provides skills like technical skills, technology,human skills, expertise, and marketing skills.
It makes large projects and turn key projects
feasible and possible.
It synergizes due to combined efforts of variedparties.
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Conflict may arise
Partner delay the decision making once the disputearises. Then the operations become unresponsiveand inefficient.
Life cycle of a joint venture is hindered by manycauses of collapse
Scope for collapse of a joint venture is more due toentry of competitors changes in the partners
strengthThe decision making is slowed down in joint
ventures due to the involvement of a number ofparties.
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Acc to Bronder and Pritzi
strategic alliances in terms of at least twocompanies combining value chain activities for thepurpose of competitive advantage
Examples are:
Technology swaps
R & D exchanges
Distribution relationship
Marketing relationship
Manufacture- supplier relationship
Cross-licensing
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Subsidiary means individual body under parent body.
This Subsidiary or individual body as per their own
generates revenue.
They give their own rent, salary to employees, etc. But
policies and trademark will be implemented from the
Parent body.
There are no branches here.
Only the certain percentage of the profit will be given
to the parent body.
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A subsidiary, in business matters, is an entity
that is controlled by a bigger and more
powerful entity.
The controlled entity is called a company,
corporation, or limited liability company and
the controlling entity is called its parent
company.
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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 two companies is called
Management Contract.
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A FTZs is a tax free area in a particular country
that is not considered part of the respective
country in terms of import regulations and
restrictions.
Product can be shipped to a free trade zone,
undergo additional manufacturing processes, and
then be shipped further to the target market
There are two Free Trade Zone in India Kandla Free Trade Zone
Santacruz Free Trade Zone
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http://amalgamation.in/amalgamation-
meaning.htm
http://www.investopedia.com/university/mergers/
http://www.strategicalliance.org/
http://en.wikipedia.org/wiki/Franchising
http://www.businessdictionary.com/definition/man
agement-contract.html
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I have discussed total 13 modes on entry into the
International market for the entrepreneurs.
With their advantages, disadvantages, reasons andfactors to be considered.
I have used 3 figures to explain three different
modes i.e., Exporting, Licensing and Strategic
Alliance.
I have used a total of 48 slides.
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