modes of entry
DESCRIPTION
A preview and summary of different modes of entry is herewith presented.TRANSCRIPT
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Group Members
• MANDARY Tejusvi Maheshee
• BUROTY Priya Soohashenee
• ARIA NAICK Keshav
• BUNDHOO Tinadevi
• JAGUESSUR Yasthanandsingh
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Examples in the Business ContextMode of Entry
Franchising
Licensing
Wholly Owned Subsidiary
Exporting
Turnkey Project
? ?
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Using examples from the business context, evaluate the mode of
entry adopted by firms.
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Entering a new market is always a risky business, with a big risk of failure.
Mode of Entry
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Mode of entry (cont..)
When a firm is going to explore a foreign market, the choice of the best mode of entry will arise in the firm’s expansion strategy.
The choice of mode for entering a foreign market is thus a major issue.
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3 Main Categories of Mode of Entry
Export
• Direct Export
• Indirect Export
Contractual
• Turnkey Projects
• Licensing• Franchising
Investment
• Joint Venture
• Wholly owned subsidiary
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Exporting
Frequently employed mode of internationalization.
One of the simplest and most
common approaches adopted by firms in their endeavour to enter foreign markets.
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Exporting (cont...) A simple definition of exporting :
‘An action by a firm to send produced goods and services from the home country to other countries.’
According to Kotler (2000:374)
the normal way to get involved into a foreign market is through export.
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Generally firms export for two reasons:
1. Firms need experiential knowledge
Exporting has the potential to provide firms with international experience without their taking high risk or strong commitment.
2. To expand their sales in order to achieve economies of scale.
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Two types of Export
• Producer sells directly to the importer
• Very little or no knowledge about the foreign market is needed
Direct Export
• A firm in the domestic country is used to do the exporting for the manufacturer
• The sale of a firm’s products in foreign markets through an export agent
Indirect Export
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Direct Export
This mode gives the company a greater degree of control over its distribution channels.
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Indirect Exporting
This mode is seen as a good way of gaining knowledge
about a potentially interesting market.
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Floreal Knitwear Ltd
Leading knitwear manufacturer in the African Sub-Saharan Region
Second largest woolmark knitwear supplier in the world.
Produces men's, ladies, and kids wear styles over various knitting gauges.
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The knitwear is exported to renowned European and US retail organizations.
Major European retailers such as: - Marks & Spencer- Next - George- Burton- Celio- Hema- La Redoute- Carrefour
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Advantage
No high resource commitment in the targeted country
Inexpensive way to gain experiential knowledge in foreign markets
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Disadvantage
※Export, although rewarding, is generally an expensive activity which require additional financial resources.
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Toyota (Australia)
One of Australia's leading automotive companies.
A leading manufacturer, distributor and exporter of vehicles
Market share of 18 % in 2011
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Evidence: 2011 export figure of 59,949 units worth
$1.004 billion http://www.toyota.com.au/t
Established as a truly global company
Now tackling the challenge of increasing their export figures to even greater
and unprecedented heights.
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The recipe for their sustainable export success is
‘the ability to understand, meet and exceed the varied expectations of our
overseas customers’
Export to 13 destinations worldwide in Middle East, New Zealand
and the Pacific Islands.
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Advantage
Low-cost strategy to expand sales in order to achieve economies of scale
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Disadvantages
※Hard to control operations abroad
※Provides very small experiential knowledge in foreign markets
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2nd Type of Mode of Entry
Cont
ract
ual •Turnkey Project
• Licensing
• Franchising
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Turnkey Projects A method for a foreign company to export
its process and technology to other countries by building a plant in that country.
The company hires a contractor in the desired country that they want to create an operation.
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Turnkey Projects The turnkey contractor is responsible
for the – Design
– Construction
– Installation of a new plant
– Maintenance of the plant ( in some cases)
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At the completion of
the contract, the foreign company
gives the “key” to the project
and it is ready for operation.
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Turnkey projects are most typical in companies that specialize in expensive, complex production technologies, such as the
- Chemical industry
- Pharmaceutical industry
- Petroleum refining industry
- Metal refining industry
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Larsen and Toubro Ltd
Source: http://www.ibef.org/download/Larsen_%26_Toubro.pdf
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L&T’s engineering and construction track record consists of successful implementation of turnkey projects in major core and infrastructure sectors of the Indian industry.
http://www.larsentoubro.com/
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L&T projects in MauritiusConstruction of:a turnkey 10.8 mn litre-per-day water
treatment plant at Mont Blanc;
70 m-high, 12-storey Cyber Tower, utility buildings and site development works for Business Parks of Mauritius Limited;
The Swami Vivekananda International Convention Centre.
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Advantages
Seek the economic gains without the political complications
Earn profits in a foreign country
Possibility to establish a plant
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Disadvantages
Risk of revealing companies secrets to rivals
Takeover of their plant by the host country
Does not often have any long-term interest in the country
May create a competitor
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Licensing A key mode of entry for firms targeting
international expansion.
Defined as ‘ a contractual mode of entry, whereby a
company (the licensor) grants a foreign firm (the licensee) the rights to use some or all of its intangible properties (patents, trademarks, copyrights, etc.).’
Osland; Taylor; Zou (2001)
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It is to be noted that, a royalty fee is given to the licensor.
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Oracle Corporation
An American multinational computer technology corporation
Specializes in developing and marketing hardware systems and enterprise software products.
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Their goal is: ‘ to help organisations optimize their software
investment by enhancing their understanding of Oracle's licensing practices’.
They offer their leadership for corporate best practices by making licensing information publicly available.
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In Mauritius, Oracle’s Licensing partners are:
Anglo African LTD
VESL Technologies Ltd
De Chazal Du Mee Consulting
STATE INFORMATICS LIMITED
SOFTPRO N&P
HAREL MALLAC COMPUTERS LTD
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Has licensed its famous trademark to clothing manufacturers, which have incorporated the design into their clothing.
Coca-Cola
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Advantages
Speedy entry to foreign market
Marketing of the brand
Can be used as a step towards a more committed mode of entry
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Disadvantages
• Hard to monitor partners in foreign markets
• Hard to enforce agreements
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FranchisingA method of business expansion over
the last thirty years (Eroglu
1992)
It involves ‘a franchisor firm that undertakes to transfer a business concept that it has developed, with corresponding operational guidelines, to non-domestic parties for a fee’.
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Franchisors are responsible for
improving the product/service mix,
policing outlet quality,
promoting the brand in the host country.
High level of trust is needed
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Examples• Examples of companies that use franchising as a mode of
entry are
– McDonalds,
– Kentucky Fried Chicken,
– Hilton hotels
(Johnson/Beaton (1998), p. 107; Hill/Jones (1998), p. 263).
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Pizza Hut
World's largest Pizza Restaurant Company– more than 12,000 restaurants
– in over 80 countries
– 30 years of experience in building great franchise partnerships.
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The management of Pizza Hut believes that that each franchise brings
Unique insights
Skills
Experiences from diverse backgrounds.
Source: http://www.pizzahutfranchise.com/
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Pizza Hut in Mauritius• Over the past 20 years, the Happy World
Group is the master franchisee in Mauritius for 'Pizza Hut' in the Casual Dining market segment.
• Their network of 12 outlets covers all the towns in Mauritius.
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Advantages
Speedy entry to foreign market
Requires a moderate resource commitment in the targeted country
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Disadvantages
Could damage the firm’s reputation and image
In this respect, Pizza Hut takes franchisee recruitment very seriously.
They want a network of successful partners; seek individuals who have:
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Source: http://www.pizzahutfranchise.com
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BATA
One of the world's leading footwear retailers and manufacturers
Source: http://www.bata.com/
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To enter the new foreign markets and expand on an international level the Bata brand.
Combine opportunity and local markets knowledge with reliable partners who have a long term vision.
Share with the new partner our know-how in the shoe business.
Give the maximum attention to the different local needs (fashion trends, climate, seasonal trends, specific needs, usages and customs).
Source: http://www.batafranchise.com/
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Advantages
Speedy entry to foreign market
Moderate-cost strategy to expand sales in order to achieve economies of scale
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Disadvantages
Does not provide experiential knowledge in foreign markets
High potential for opportunism
High monitoring costs
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3rd Type of Mode of Entry
Inve
stm
ent •Joint Venture
• Wholly Owned Subsidiary
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Joint Venture Became an important element of
many firms’ international strategies.
Defined as ‘an enterprise, corporation or
partnership, formed by two or more companies, individuals, or organizations, at least one of which is an operating entity which wishes to broaden its activities, for the purpose of conducting a new, profit-motivated business of permanent duration.’
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Commonly used by firms to as a means of
Competing multi-domestic or
Global competitive arenas
(Porter & Fuller 1986; Harrigan 1988).
Motives for Joint Venture
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New Markets Take existing products to foreign markets
To diversify into new business
Existing Markets To strengthen the existing business
To bring foreign products to local market
Existing Products New Products
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Joint venture is associated with providing access to :
resource and market,
technology transfer,
reduce political risk and
help to improve the firms competitive position.
(Bradley 2005:249)
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Apollo Hospitals Group
The largest healthcare group in Asia
With more than 7,500 beds in 43 hospitals
16 million patients from 55 countries
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Apollo Group of Hospital
India and Parkway Health of Singapore
Apollo Gleneagles Hospitals
Apollo Group of Hospital
Munich Health
(Germany)
Apollo Munich
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Apollo Group of Hospital
British American
Investment Co.
(Mauritius) Ltd
Apollo Bramwell Hospital
The hospital is
– equipped with the latest technology and high end medical equipments.
– poised to deliver advanced tertiary care of international standards to Mauritian people as well as tourists
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Advantages
Technology sharing and joint product development
Reduce political and economic risks as a result of the involvement of the native partner
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Disadvantages
Mistrust over proprietary knowledge
Performance ambiguity - how to split the pie
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Toyota Mauritius
Toyota Tsusho
Corporation
Beechand Company
Toyota Mauritius
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Continuously worked to contribute to the sustainable development of society
HOW?
Through provision of innovative and high-quality products and services that lead the times.
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Advantages
Partners are able to learn from one another while limiting access to their own proprietary skills
‘Toyota Mauritius now combines its experience in the local market and the know-how of a global network to reinforce its position in the local market.’
Source: http://www.toyotamauritius.com
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Disadvantages
Lack of parent firm support
Performance ambiguity - how to split the pie
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Wholly Owned Subsidiary The firm owns 100 % of the stock
Keegan and Schlegelmilch (2001)
The most expensive method form of market entry
Requires the greatest commitment in terms of management and resources
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Two options
Wholly Owned Subsidiary
Greenfield Investment Acquisition
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Greenfield Investment Building an entirely new subsidiary
in a foreign country from scratch to enable foreign sales and/or production.
The parent firm has decided to clone its strategy and structure in the foreign plant
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HOW? By transferring its
technology,
supply chain
organizational structure, and
Corporate culture. (Hennart and Park 1993)
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Acquisition
Combining two companies from different countries to establish a new legal entity.
Acquisition of a local firm’s assets by a foreign company.
Both local and foreign firms may continue to exist.
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Acquisitions v/s Greenfield Investment
Firms with weak competitive advantage tend to use acquisitions while
Those with strong competitive advantages prefer Greenfield investments to transfer their advantages to foreign markets .
Hennart and Park (1993)
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Indian Oil Corporation
India's flagship national oil company
Set up subsidiaries in Sri Lanka, Mauritius and the United Arab Emirates (UAE)
Scouting for new business opportunities in the energy markets of Asia and Africa
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Indian Oil (Mauritius) Ltd (IOML)
A wholly owned subsidiary company of Indian Oil Corporation Ltd
The third largest petroleum company in Mauritius.
Holds an overall market share of 24%
Competes with other multinational companies present in Mauritius for over five decades.
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Advantages Provides high experiential knowledge
in foreign markets
Low level of conflict between the subsidiary and the parent firm
Able to control operations abroad
Does not have the problem of integrating different cultures, structures, procedures, and technologies
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Disadvantages
Could not rely on pre-existing relationships with customers, suppliers, and government officials
Potential difficulty in accessing existing managers and employees familiar with local market conditions
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Oracle Enlarged its share of the software
market through a number of high-profile acquisitions.
Oracle seeks to: strengthen its product offerings, accelerate innovation, meet customer demand more
rapidlyexpand partner opportunities.
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Oracle Acquisitions
Oracle's Mergers and Acquisitions philosophy
‘its consistent commitment to customer service and product support while achieving its financial return objectives and creating value for its shareholders.’
Source: http://www.oracle.com/us/corporate/acquisitions
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AdvantagesLow risks of technology appropriation
Access to existing managers and employees familiar with local market conditions
Could rely on pre-existing relationships with customers, suppliers, and government officials
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Disadvantages
Managers of acquired foreign subsidiaries may have a weak attachment to the parent firm
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CONCLUSION
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The selection of a market entry mode is a critical decision
Firms seek to expand geographically due to Convergence of technology Emergence of alternative communication
structuresIncreased competitive arena in which they
operate
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Be proactive rather than reactive in their approach to internationalisation
Findings from our assignment:
no best way to enter a foreign market
the mode of entry may differ from
one country or region to another
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Oracle
Licensing
Acquisitions
Greenfield Investment
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Life Insurance Corporation
Joint Ventures
Greenfield Investment
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Toyota Corporation
Export
Joint Ventures
Greenfield Investment
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Apollo Group Hospitals
Franchising
Joint Ventures
Greenfield Investment
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If You have any question
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Thank You