MODES OF ENTERING INTERNATIONAL BUSINESS

DECISION OF MODES OF ENTRY :

To decide the mode of entry the following factor is to be considered :- Ownership advantages Location advantages Internationalization Advantages

OWNERSHIP ADVANTAGES :

Ownership advantages are those benefits that the company may have by owning the resources.

TISCO Ltd. Owned its iron ore mines and collieries. This advantage makes it the least cost producer of molten iron

Location advantage :

Certain location factors grant benefit to the company when the manufacturing facilities are located in the host country.

Customer needs , preferences and tastes Logistic requirements Cheap land and acquisition costs Political stability Cheap labour Low cost of raw materials Climatic Conditions.

Internationalisation advantages:

Internationalisation advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host countries.

Toyota enters foreign markets through direct investments and joint ventures as the local companies in foreign countries cannot produce as efficiently as Toyota.

Different modes of entry:

1. EXPORTING -indirect exporting-direct exports-intra-corporate transfers

2. LICENSINGInternational Licensing

3. FRANCHISINGInternational Franchising

4. SPECIAL MODES-Contract manufacturing-BPO-Management Contracts-Turnkey projects

5. FDI without alliances6. FDI with alliances7. Interfirm cooperation8. Contractual agreements9. Equity participitation10.Diversification11.Take over strategies12.Wholly owned subsidiaries13.Expansion through concentration14.Strategic alliances

Exporting

Advantages :-Need for limited financeLess riskMotivation for exporting

Forms of exporting :-Indirect exportingDirect exportingIntra corporate transfers

Factors to be consideredGovernment policiesMarketing factorsLogistics considerationDistribution issues

Export intermediaries

Export management companies Co-operative societies International trading company Manufacturers’ agents

Export and import brokers Freight forwarders

Licensing

• The property licensed may include: – Patents– Trademarks– Copyrights– Technology– Technical know-how– Specific business skills

Basic issues: Boundaries of the agreement Determination of Royalty Determining rights, privileges and constraints Dispute settlement Mechanism Agreement Duration

Benefits and Costs of Licensing:Costs

• It is a very limited form of foreign market participation.• It does not guarantee a basis for future expansion.• The licensor may create its own competitor.

Benefits• It requires neither capital investment nor detailed involvement with foreign

customers.• It capitalizes on research and development already conducted.• It helps avoid host country regulations applicable to equity ventures.

Why go in for Licensing

• Less risk of capital and no involvement with foreign customers

• Avoids host-country regulations

• Allows a company to test the market

• Avoids cultural problems

• Trademark licensing —permits the names or logos to be used on products made in foreign market

• May be creating own future competitor

• Or

• Licensing, in the business world, is a contractual agreement to use a brand name, patent or property that is owned by another business entity.

For example, a greeting card company can obtain a license to use images of Hannah Montana or "The Simpsons" characters on greeting cards

Franchising:

• The major forms of franchising are :

– Manufacturer-retailer systems such as car dealerships,

– Manufacturer-wholesaler systems such as soft drink, companies

– Service-firm retailer systems such as fast-food outlets.

Key Reasons for Franchising

Financial gain

Market potential

Saturated domestic market

Franchising agreements

Franchisee has to pay a fixed amount and royalty based on sales.

Franchisee should agree to adhere to follow the franchisor’s requirements

Franchisor helps the franchisee in establishing the manufacturing facilities

Franchisor allows the franchisee some degree of flexibility.

Need for Franchising

• Internationally, the firm must be able to offer unique products or selling propositions

• Must offer a high degree of standardization, but be adaptable to local circumstances

• Growing fast internationally, but government intervention is a major problem

• Selection and training of franchisees is also a problem area.

• Or

Franchising: A specialized form of licensing in which franchisor not only sells an independent franchisee for the use of intangible property but assist in areas such as promotion and training.

A franchise is a business that operates under an existing brand name. Many popular businesses are franchises, including McDonald's, Subway

Contract manufacturing

Contract manufacturing is outsourcing entire or part of manufacturing operations

E.g.: pharmaceuticals, textiles etc

BPO

Business Process Outsourcing is the long term contracting out of non core business processes to an outside provider to help achieve increased shareholder value.

WHY BPO

• To enable executives to concentrate on strategy.

• To improve processes and save money

• Increase organisational capabilities.

Management contract

A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialised services to the second company for a certain period of time in return for monetary compensation.

or Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training

Management contracts are often formed where there is a lack of local skills to run a project

FDI without alliances

Companies enter the international market through FDI , invest their money, establish manufacturing and marketing facilities through ownership and control.

Greenfield strategy- the term Greenfield refers to starting of the operations of a company from scratch in a foreign market.

Fdi with strategic alliances

Strategic alliance is a cooperative and collaborative approach to achieve the larger goals.

Role of alliances

Many complicated issues are solved through alliances

They provide the parties each other’s strengths

Helps in developing new products with the interaction of 2 or more industries

Meet the challenges of technological revolution. Managing heavy outlay

Become strong to compete with a multinational company.

Modes of FDI through alliances are:

Mergers and acquisitions

Joint ventures

Mergers and Acquisitions

What Does Merger Mean?

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Pixar-Disney Merger

or

A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued.

If both the organization dissolves their identity to create a new organization, it is consolidation.

Horizontal Mergers

Vertical Mergers

Conglomerate Mergers

Concentric Mergers

Acquisition

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.

HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion

Joint Ventures

A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise

Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones

Or

Joint ventures is a case where two or more companies form a temporary partnership for a specified purpose.

Joint ventures may be useful to gain access to a new business mainly under these conditions:

• When an activity is uneconomical for an organization to do alone.

• When the risk of business has to be shared.

• When the organization has to overcome the hurdles, such as import quotas, tariffs, nationalistic – political interests, and cultural roadblocks.

When more than two companies are involved it becomes a “consortium”

FUNCTIONAL ALLIANCES

PRODUCTION ALLIANCES

MARKETING ALLIANCES

FINANCIAL ALLIANCES

RESEARCH AND DEVELOPMENT ALLIANCES

BREAKING UP OF ALLIANCES

Incompatibility of partners

Access to information

Distribution of income

Changes in business environment

Acquiring the strengths of the partner

Legal factors

Interfirm Cooperation

• Reasons for interfirm cooperation include:

– Market development

– To share risk or resources

– To block and co-opt competitors

• Equity participation

• Some companies have acquired minority ownerships in companies that have strategic importance for them.

• Reasons for engaging in equity participation include:

– It ensures supplier ability

– It builds working relationships

– It creates market entry and support of global operations

Contractual Agreements

• Strategic alliance partners may join forces for R&D, marketing, production, licensing, cross-licensing, cross-market activities, or outsourcing.

• Contract manufacturing allows the corporation to separate the physical production of goods from the R&D and marketing stages.

• Management contracts involve selling one’s expertise in running a company while avoiding the risk or benefit of ownership.

• A turnkey operation is a contractual agreement that permits a client to acquire a complete system following its completion.

diversification

It involves a substantial change in the business singly or jointly- in terms of customer groups or alternative technologies of one or more of a firm’s businesses. There are two categoriesDiversification

Concentric Diversification: when an organization takes up an activity in such a manner that is related to the existing business definition of one or more of firms businesses, either in terms of customer groups, customer’s functions or alternative technologies

Marketing related concentric diversification Technology- related concentric diversification Marketing- technology related concentric diversification

Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities which are unrelated to the existing

businesses. Takeover Strategies

Takeover or acquisition is a popular strategic alternative adopted by Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently classified as hostile takeovers and friendly takeovers

A welcome takeover is usually referring to a favorable and friendly takeover. Friendly takeovers generally go smoothly because both companies consider it a positive situation or by mutual consent.

A hostile takeover is where it is expected to be opposed, by the existing management or professionals and it can be accomplished through a tender

offer .

Strategic alliances

They are partnership between firms whereby their resources, capabilities and core competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services

For example: A major website could form a strategic alliance with an analytics

company to improve its marketing efforts. Wholly-Owned Subsidiary (WOS)

A wholly-owned subsidiary is a company whose stock is entirely owned by another company. The owner of a wholly-owned subsidiary is known as the parent company or holding company. Because the parent company owns all of the stock of the wholly-owned subsidiary, the parent company can control all of its activities.

This arrangement is common among high-tech companies who want to retain complete control and ownership of their technology.

Expansion through concentration

It involves converging resources in one or more of firms businesses in terms of their respective customer needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in expansions .

Concentration can be done through

• Market development

• Product development

IB Strategies

What is International Business? Meaning

International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports.International Business is also known, called or referred as a Global Business or  International Marketing

strategy

An organization’s strategy shows what the organization wants to achieve and how it will achieve. It includes:

The purpose of the organization Goals and objectives Plans and methods to achieve these goals and objectives

The five HOWS

How to grow? How to please customers? How to out-compete rivals? How to respond to changing markets? How to achieve objectives?

reasons

To reduce costs To specialize in competencies To avoid or counter competition To gain knowledge To gain location-specific asset To overcome governmental constraints To diversify geographically To minimize exposure in risky environments

TYPES OS STRATEGIES ADOPTED BY INTERNATIONAL COMPANIES

Diversification Mergers Take overs Strategic Alliance Joint Ventures Licensing Franchising Management contracts Wholly-owned subsidiary (WOS)