L1 International Marketing Strategy

Theme: preparing to enter the overseas market

Modes /methods of market entry

Classification of modes of entry

There are 3 groups according to Hollensen ( 2012)

1 Export modes – these have generally low control, low risk, more flexibility

2 Intermediate modes-these usually involve a contract and hence are involved with shared control and risk and split ownership

3 Hierarchical modes-these usually involve investment , high control ,high risk and low flexibility.

N.B. See also text by Paliwoda and Thomas

Classification of modes of entry

Export modes

Intermediate modesHierarchical modes

Levels of entry mode/ appropriate formats/increasing presence

Licensing e.g. mickey mouse tea- shirts, Disney

Franchising e.g.Macdonalds’ ,New York

Agency e.g. Sonic- aid ,Oxford

Distributorship e.g. Ziani brothers, Middle East

Overseas sales office / manufacturers representative office e.g NBC software,Italy

Joint venture e.g. Virgin records, Japan

Overseas subsidiary e.g.Glaxo Smith Kline , Singapore

Developing a presence overseas

1 There are several ways that a company can develop a presence overseas.These are ranked in increasing importance [ see diagram].

2 Notice within the ranking that there is an increasing commitment by companies.This is both in terms of financial commitment and also in terms of human resources.

3 A company must therefore ensure that there are sufficient levels of sales/ sales potential i.e. [ profit ] generation to cover the appropriate level at which it wishes to enter the market.

4 There are also other factors that affect the appropriate level of entry[ see later]

Factors influencing choice of mode of mkt. entry(1)

A Internal factors-1 resources e.g.A small firm has low resources therefore will probably choose exporting as a mode

2 Level of experience, if high, then cost and uncertainty are lower.In this case probably direct investment such as wholly owned subsidiary will be used.

3a Product characteristics e.g high value to weight (e.g. a watch) then probably direct exporting

3bProduct characteristics e.g. low value to weight( e.g. canned beer) then probably licence or via bottling plant if demand is likely to be high

3c Product characteristics e.g. Predelivery inspection and possibly after sales service ( e.g. cars) here specialist distributors for the marque would be used.

Factors influencing choice of mode of mkt .entry (2)

B External factors1 cultural distance- if great, then use joint venture e.g. China or agency( low cost / more flexible)

2 Country risk/ or uncertain demand. Here ‘due diligence’ of the types of risk needs to be undertaken. If in doubt choose low exposure t o risk by choosing exporting as a mode. 3a market size and growth-if both are high management will commit resources e.g. establish a wholly- owned subsidiary or majority owned J.V.

3b market size and growth- if low, then use licensing as a mode of entry

4 Trade barriers – if tariffs are high then use local production or J.V.

5 Preference for local suppliers/ country of origin effect – use local sourcing/ production

6 Intensity of competition- FOLLOW LOW RISK resource commitment / use exporting.

Factors affecting choice of mode of entry( 3)

C Desired mode characteristics

1 risk averse - use exporting, licensing or possibly J.V.

2 control- if low control, use indirect exporting

if high control is needed use contract manufacturing, wholly owned subsidiaries

3 Flexibility-usually with more equity investment or more costly modes , flexibility diminishes. Difficult to change in the short run / or pull out.

1Licensing

Definition :Licensing confers a right to utilise a company- specific and patent- protected process in manufacturing. This right is conveyed in the transferral of original designs or blueprints.

Paliwoda

Examples Mickey mouse tea shirts licensed from Disney corporation

Medicines made under licence by pharmaceutical companies such as Glaxo Smith Kline.

N.B. The terms of the licence must be strictly adhered to hence consult an appropriate lawyer.

N.B. Be aware of the length of the licence

2 Franchising

Definition: Franchising confers the right to use the company’s name ,logo and may / may not include marketing support

Examples: Macdonalds’ franchise worldwide

N.B. Beware of the terms and conditions .These might stipulate purchase of supplies from the main franchisor.

N.B. Some agreements may stipulate a % of your turnover as well as an up- front payment for the franchise right .

Always take proper legal advice and also ask to visit other existing franchisees i.e. from the main

franchisor.

3 Agency [part 1]

• An agency is a representative of your company abroad.There are various types of agency ranging in size and numbers of personnel .Some agencies may also take on the role of distributor[ see later].The most expensive agencies are ‘Del credere’agents..These charge a higher commission but there is a greater chance that the sales/orders will materialise if they are via the latter.

• Agency search: research for and appointment of agencies is vital .

[You are only as good as the people who represent you abroad]. • Sources of help : D.T.I. , chambers of commerce in the country

concerned and /or London chamber of commerce . Also embassy commercial departments, trade shows/ exhibitions, trade associations, agents associations. Recommendations of companies in that market.

Agency [ part 2]

• Agency selection : be ultra careful on this aspect. It may be expensive to dismiss a poorly performing agency. Also in some European countries social charges are approx 45% of the salary ,added to the salary .

• Take references i.e. of other companies that the agency has worked for. Take financial references as well.

• Compile a check list of key questions to ask e.g. test their product knowledge, ask if they can draw up a marketing plan. Do they have any marketing qualifications ?Names and contact details of some of the customers that they have dealt with. If in doubt do not appoint.

Agency [ part 3]

• Agency motivation : a variety of measures need to be implemented to both motivate and reward and also to retain the best agencies.

• Financial rewards e.g types of commissions , flat rate , sliding scale,

commission- only.

• Non – financial rewards e.g performance based points systems ,

Agency [ part 4 ]

4 Distributorship

• A distributor actually purchases the product from the manufacturer. • A distributor is usually bigger than an agency/ has greater coverage

of the overseas market and is more independent.• He takes legal title to the good.[ Compare this to an agency where

the agent is a representative for the company and never owns the product] .Implications……

• a] The distributor can set his own price for the product just bought from you. This may even be too high but you as the exporter cannot do anything about it.

• b] The distributor may even sell competitor products alongside your product but again you cannot do anything about it.

• Why use a distributor? Answer usually because they have both channel strength and network coverage. Hence use them to gain quick access to markets.

5 Overseas sales office/manufacturers representative office

• This is favoured by some companies usually where there are difficult or complex tax laws e.g. in Italy ,or in America.

• The overseas sales office is really an extension of the parent company’s sales office abroad. The subtle difference is that the overseas office does not take payment from clients and hence cannot be taxed. All other sales and marketing functions are same/ similar.

• This mode of entry is often suited to regular customer back up where technical representives need to be on hand. e.g. computer installation companies, main frame companies. Often these types of products/ software break down frequently.

6 Joint venture

• Joint ventures are a collaboration of two or more organisations for more than a transitory period. Partners share assets risks and profits. Contributions of partners may include finance/ capital, technology, know – how, marketing and / or plant &equipment.

Czinkota &Ronkainen

Paliwoda distinguishes two types of J.V.’s…….

1 Contractual joint ventures… these are for a fixed or limited duration .Each partner having tasks and responsibilities.

2 Equity joint ventures….these are continuous, involve investment but are more risky.

Joint ventures continued

Examples of J.V.’s

Pepsico and Lipton joined to market canned iced tea

K.F.C. and Mitsubishi real estate to establish a KFC chain in Japan

Siemens and Corning to market fiber- optic cables

Advantages of J. V.’s

• Use of JV ‘s often helps minimise the effects of difficult market conditions in the overseas country. E. g .difficulties in distribution in Japan led to Virgin records entering a joint venture to open retail outlets to sell their records.

• E.g .red tape from the authorties in China has led to many J.V.’s with British and other companies. This is the most popular form of market entry.

• Synergistic effects may be the outcome . For instance a firm with a technological specialism may need the collaboration of other partners and / or their financial help. E.g. the development of helical scanning which in turn permitted the development of the video recorder.This could have only taken place with a J.V.comprising of the major Japanese electronics manufacturers.

• Look also at the development of Rolls Royce engine RB211with the assistance of General Electric.

Disadvantages of J.V.’s

• Problems may arise with the actual implementation of the J.V.agreement. There may be issues of management and control e.g the use of ’ murumachi’ management methods in Mexico [based on murumachi bands where each participant takes turn to lead the music].Japanese companies found this to be the best method here.

• Conflict of interests… these may prevent full disclosure of technologies to partners. In the case of the development of helical scanning/ video recorders, it was eventually agreed that all partners having jointly developed the technology could each market and compete with each other with their own version of the video recorder!

• Conflicts may also arise with the present sharing of profits and provisions for long term investment.Typically Western companies are short term v Japanese long term.

7 Overseas subsidiary

• Overseas sales subsidiary is the mode of entry usually requiring the biggest financial and resource commitment of all. Hence decisions must be taken for the long term .There must be a strong and expanding sales base to justify this mode of entry.

• N.B. It may be the case that the subsidiary will probably make and market its products to other markets not just its own domestic market.In this case the previous calculation/ forecast should take this into account.

• Because of their long term perspective and financial commitment, host Governments may be involved.The advantages to them are foreign direct investment, employment plus contributions to G.D.P.and the economy.

• Examples include Sony in South Wales. ditto. L.G.Electronics • N.B. as more and more business functions transfer to the subsidiary

from the parent so the subsidiary begins to globalise

Overseas subsidiary continued

• Advantages : responsiveness – the subsidiary can both research and adapt quickly to local conditions. Hence sales may be higher and also products more up- to- date i.e. in order to meet local conditions

• Host government’s approval may lead to tax advantages , other benefits e.g. green -field sites.etc.

• Lower factor inputs e.g lower labour costs , lower local rates [ Dyson relocated production from Wiltshire to China for these reasons] maybe lower material costs

Overseas subsidiary continued

• Disadvantages: there may be control difficulties by H.Q. Budgets may be quickly overspent abroad.

• Transfer of functions like production may lead to the ‘hollowing out’ of the parent company and the loss of its technological base .

• Transfer of H.R.M. abroad may lead to unemployment in the parent country

Which mode[s] of entry would you choose for Italy if marketing U.K-.produced washing machines ? I

International outsourcing/ subcontracting

Overview 1 Defn

2 Why outsource ?

3Buyer – seller processes

4Benefits of stable relationships

5Internationalisation of the sub- contractor

6Internationalisation of the contractor through the supply chain

Definitions

Defn ‘ A subcontractor is a person or organisation who agrees to provide semi finished products needed by a main contractor to perform another contract to which the subcontractor is not a party

Hollensen 2012

O.E.M. – ‘Original equipment manufacturer’. Here the main contractor is the o.e.m. outsourcer .The subcontractor supplies components to the main contractor

Hollensen 2012

Why out –source internationally ?

1 Helps create competitiveness especially if subcontractor is in a low factor- input economy e.g . Levi jeans made in Philippines because 80% of the cost of jeans is in the sewing stage

2 Contractor can develop experience / skills / economies of scale

e.g. Specialisation of bathroom taps / fittings in China 3 General cost efficiency i.e.quality in the delivery is also

important , good delivery saves high buffer stocks as a result of the reliability of the subcontractor

4 Subcontractor can innovate as a result of better knowledge of the component .Also use ideas gained from other customers that he makes products for

5 Transfer or offload some of the risk to subcontractor especially if there is fluctuating demand and short product life cycle

Buyer – seller processes( interaction theory)_

Subcontracting has taken on more activities and now includes design , R&D and other requests from the main contractor. It is the relationship between the subcontractor and main contractor that is the key to success. The relationship is affected by

1 Technology – this includes both the product and the related production process. Developments in technology may emanate from either side.

2 Complexity of products/ ambitious products may only be possible given the presence of a strong an d stable relationship

3 The nature of the relationship itself may vary from a ‘one- off’ transaction to an ongoing ‘permanent’relationship

Benefits of relationships between subcontractor and main supplier

1 Better customer / long term development/ return business

2 Better service development with customer/ problem solving

3 Better platform for product development

4 Better atmosphere / useful when there are difficulties to sort out

5 Better communication and trust

6 Shared values and decision making

7 Joint investment for the future

Internationalisation of contractors

When some firms internationalise they have a choice of either local or overseas subcontractors to supply their overseas production plant

Cost or quality may affect choice of the above

Implicit in this decision is a long term perspective especially with regard to long term procurement

e.g. Ikea’s move to Canada- Ikea took with it some of its own Scandinavian sub-contractors. Some of the latter set up their own subsidiaries.

Internationalisation of subcontractors through the supply chain

The creation of a strategic alliance between Renault and Volvo eventually lead to Swedish subcontractors providing components to Renault and conversely vice – versa.

Independent internationalisation by the contractor may take place.This may be in order to justify investment in large production / economies of scale .But this is risky for small contractors

Turnkey contracts( project exporting )

Turnkey contracts are usually for large projects /contracts e.g. Nuclear power stations

There is usually a main contractor who will organise a consortium of smaller companies for the duration of the project

e.g. The suspension bridge over the Bosphorus was designed by the leading contractor Ove Arup .Smaller construction companies joined the consortium for steel cabling , road construction etc.

References

Hollensen( 2011) chp 13

Czinkota & Ronkainen( 2012) chp 7

Ghauri and Cateora(2010) chp 11

Lee & Carter(2009)chp 7

Johansson ( 2006)chp 6