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Global Market Entry Strategies: Licensing,
Investment, and Strategic Alliances
Power PointFor
GBO
Case 1A car-making company from country A wants to commence selling its cars in country B. Owing to much higher production costs in country A and substantial cost escalation (the costs of overseas freight, insurance and custom duties), country B retail prices in the export option would be around US$20,000, while the alternative of manufacturing these in country B produce retail prices in the vicinity of US$15,000. Apart from the extra costs involved, country B applies quotas to car imports, setting these recently at 50,000 cars per year. At $20,000, there would probably some 8,000 of these exported to country B and sold there within the next 12 months, and then 12,000 sold in the second year and then, from the third year the sales would have levelled off at some 15,000 for the next two-to-three years. On the other hand, an FDI option would have cost the car-making company some $70,000,000 and would have seen first cars leaving the new production line in 24 months only. Achievement of full production and marketing capacity would have then taken an extra 18 months. The demand for these cars at $15,000 is estimated at min. 25,000 for year 3 through 7. Which of the two entry options should the car maker take? What would this choice depend on?
IntroductionTrade barriers are falling around the world
Increasing dependence of companies on international business for survival and growth.
A growing intensity of competition would call
for an improved quality of the overseas market and entry mode selection
Companies need to have a strategy to enter world markets
Selection of overseas markets and entry modes lies at the very heart of any international strategy
Modeling approaches
The literature of the subject makes distinction between three broad groupings of foreign market entry modes:
export,
contractual and
investment-based
Modeling approaches….contd…
Most classifications of market entry modes (e.g. Cateora, 1996; Keegan, 1995;
Onkvisit and Shaw, 1993) contain only
generic categories, such as direct or indirect
exporting, franchising, licensing, joint
venturing, partially or wholly owned
overseas subsidiary, management
contracting and contract manufacturing.
Modeling approaches….contd…
• Market entry mode selection is a particular
case of the wider decision process category
often referred to in the literature as market
servicing decisions
Modeling approaches….contd…
According to Root (1994), three basic approaches to entry mode selection are possible:
Root, F.R. (1994), Entry Strategies for International Markets, Lexington Books, San Francisco, CA.
Root’s classification
1 selection in absence of any market entry strategy, or ``the sales approach'‘ characterized by, among others, short
time horizons, no systematic selection criteria, few product adaptations and no effort to control overseas distribution;
2 selection in accordance with an existing market entry strategy (i.e. naõÈve or pragmatic rules (Root, 1994, pp. 159-60)); and
3 selection which considers some strategy rule(s) and involves systematic comparisons of alternative modes available (systematic approach
Various Models to market selection
These models view market selection process as composed of three stages: screening, identification (or in-depth screening), and (final) selection.
Screening
During screening, macro-level indicators should be used to eliminate countries that do not meet the objectives of the firms (Kumar et al., 1994). Johansson (1997) proposes that market size, growth rate, basic fit between customer preferences and the existing product line, and competitive rivalry be used as criteria at this stage. Root (1994) notes that country screening may be conducted either in top-down or bottom-up fashion.
Identification stage
Involves eliciting industry-specific information (market factors, competition analysis) on which to
base a short-list of potential country segments. Assessment of industry attractiveness for each of the short-listed countries considers objectives and resources constraints and expansion strategies. Market size and growth, level of competition, entry barriers and market segments are investigated at this stage.
Selection stage
selection involves studying firm specific information, such as profitability, product compatibility with the existing portfolio, to select the markets to enter. The methodology of identifying potential foreign markets proposed there considers three types of limitations:
• 1 company objectives;• 2 strategies; and• 3 resources.
Categories of factors that influence this selection comprise (Sarkar and Cavusgil, 1996):
product-market factors;
firm/foreign venture specific factors;
host-market factors; and
home-market factors.
More specifically the above includes:
cultural factors;
global industry structure;
global corporate objectives;
relational dimensions of interfirm collaborations;
firm's bargaining power with respect to foreign governments; and
political leverage of the home country government.
To demonstrate that an overseas market should be chosen over any of its alternatives requires a systematic examination of the feasibility and commercial viability of various modes of entry into alternative markets (Figure on next slide).
20
1. Selecting the Target Market
Introduction
Licensing
A contractual agreement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation– Patent
– Trade secret
– Brand name
– Product formulations
Advantages to Licensing
Provides additional profitability with little initial investment
Provides method of circumventing tariffs, quotas, and other export barriers
Attractive ROI
Low costs to implement
Disadvantages to Licensing
Limited participation
Returns may be lost
Lack of control
Licensee may become competitor
Licensee may exploit company resources
Special Licensing Arrangements
Contract manufacturing– Company provides technical specifications to a subcontractor or
local manufacturer
– Allows company to specialize in product design while contractors accept responsibility for manufacturing facilities
Franchising– Contract between a parent company-franchisor and a franchisee
that allows the franchisee to operate a business developed by the franchisor in return for a fee and adherence to franchise-wide policies
Franchising Questions
Will local consumers buy your product? How tough is the local competition? Does the government respect trademark and franchiser rights? Can your profits be easily repatriated? Can you buy all the supplies you need locally? Is commercial space available and are rents affordable? Are your local partners financially sound and do they understand the basics of franchising?
Investment
Partial or full ownership of operations outside of home country
– Foreign Direct Investment
Forms– Joint ventures– Minority or majority equity stakes– Outright acquisition
Joint Ventures
Entry strategy for a single target country in which the partners share ownership of a
newly-created business entity
Joint Ventures
Advantages– Allows for sharing of risk
(both financial and political)
– Provides opportunity to learn new environment
– Provides opportunity to achieve synergy by combining strengths of partners
– May be the only way to enter market given barriers to entry
Disadvantages– Requires more investment
than a licensing agreement
– Must share rewards as well as risks
– Requires strong coordination
– Potential for conflict among partners
– Partner may become a competitor
Investment via Ownership or Equity Stake
Start-up of new operations– Greenfield operations or – Greenfield investment
Merger with an existing enterprise
Acquisition of an existing enterprise
Global Strategic Partnerships
Possible terms:– Collaborative agreements– Strategic alliances– Strategic international alliances– Global strategic partnerships
The Nature of Global Strategic Partnerships
The Nature of Global Strategic Partnerships
Participants remain independent following formation of the allianceParticipants share benefits of alliance as well as control over performance of assigned tasksParticipants make ongoing contributions in technology, products, and other key strategic areas
5 Attributes of True Global Strategic Partnerships
Two or more companies develop a joint long-term strategyRelationship is reciprocalPartners’ vision and efforts are globalRelationship is organized along horizontal lines (not vertical)When competing in markets not covered by alliance, participants retain national and ideological identities
Success Factors
Mission. Successful GSPs create win-win situations, where participants pursue objectives on the basis of mutual need or advantage.Strategy. A company may establish separate GSPs with different partners; strategy must be thought out up front to avoid conflicts.Governance. Discussion and consensus must be the norms. Partners must be viewed as equals.
Success Factors
Culture. Personal chemistry is important, as is the successful development of a shared set of values. Organization. Innovative structures and designs may be needed to offset the complexity of multi-country management.Management. Potentially divisive issues must be identified in advance and clear, unitary lines of authority established that will result in commitment by all partners.
Alliances with Asian Competitors
Four common problem areas– Each partner had a different dream– Each must contribute to the alliance and each
must depend on the other to a degree that justifies the alliance
– Differences in management philosophy, expectations and approaches
– No corporate memory
Cooperative Strategies in Japan: Keiretsu
Inter-business alliance or enterprise groups in which business families join together to fight for market share
Often cemented by bank ownership of large blocks of stock and by cross-ownership of stock between a company and its buyers and non-financial suppliers
Keiretsu executives can legally sit on each other’s boards, share information, and coordinate prices
Cooperative Strategies in South Korea: Chaebol
Composed of dozens of companies, centered around a bank or holding company, and dominated by a founding family– Samsung– LG– Hyundai– Daewoo
21st Century Cooperative Strategies: Targeting the Digital Future
Alliances between companies in several industries that are undergoing transformation and convergence– Computers– Communications– Consumer electronics– Entertainment
Beyond Strategic Alliances
Next stage of evolution of the strategic alliance
– Super-alliance
– Virtual corporation
Market Expansion Strategies
Companies must decide to expand by:– Seeking new markets in existing countries
– Seeking new country markets for already identified and served market segments
Looking Ahead
Chapter 10 The Global Marketing Mix – Product and Brand Decisions