p
 


 


Prof. A.K. Sengupta

Former Dean, Indian Institute of Foreign Trade
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 External Factors


 Decide on -Market Environment

 -Competitive Profile
International Market Involvement
Market Identification & targeting

 
  

Marketing Mix
*Product *Price *Distribution *Promotion

Set Targets

Implement

Organise
Department Export Allocate Resources
Subsidiary *Product
Jt. Venture *Arrange Resources
Review
Export House
Modify 
Set new target
The Concept of International Market Entry
‡ An institutional mechanism by which a firm
makes its products and services available to
consumers in overseas markets
‡ Franklin Roots defines the market entry
strategy as a 
   which sets
forth the objectives, goals, resources and
policies that guide a company¶s international
business operations for achieving sustainable
growth in world markets.
Ñ
‡ Once a firm has decided to establish itself in global market²
it becomes necessary that the Company studies and
analyzes the various
 
 available to enter the
international markets and select the most suitable one.

‡ This decision is to be taken with utmost care²Not only is

the  
    but the extent to which the
companyµs       can be employed in the new
market also depends on this decision.

D
‡ Mode of entry varies from
!  "
!
 


!   
 
  eg. indirect
exports to  "   
 

 !    

 
  by establishing its own
manufacturing facilities in foreign markets (subsidiaries).
‡ Factors
i) The ability and willingness of the firm to commit

#
ii) The firm¶s desire to have a level of 
 
over
international operations.

iii) The level of  the firm is willing to take

·
   
 


Production in Home Country Production in Foreign Country

Exports Providing Offshore Contractual Mode Investment Mode

Services

Indirect Direct
Overseas Joint Venture Wholly
Assembly or Owned
Mixing Foreign
Subsidiarie
s

International International Turnkey Management International Contract

Licensing Franchising Projects Contract Strategic Manufacturing
Alliance

B&T BOT BOO

Distribution Technology Production
Access Alliance Alliance
ü
Production in Home Country
Export Entry
‡A firm has two basic options for carrying out export
operation.
--Market contacted through a domestically located
intermediary²an approach called  

 
--Market can be reached through an intermediary located in
foreign market--an approach termed as $%

 

Indirect Export
--When firms do not have much exposure and has limited
resources ±Indirect Exports
X
‡Indirect exports occur

-Selling to a domestic broker/ foreign buying agent in home

country

-Exporting through merchant intermediary-export house

‡Foreign firms having buying offices in India
‡Trading House
--Soga Shosha in Japan
--Export Management Company and Export Trading
Company in USA
--Commercializadoros in Latin American Countries
--Operateur Specialize en Commerce Exterior in France
--Trading Houses in India, Canada and Hong Kong †
 Export Houses in India
 
 
&

One Star Export House 15 Crore

Two Star Export House 100 Crore

Three Star Export House 500 Crore

Four Star Export House 1500 Crore

Five Star Export House 5000 Crore

]
‡Functions of Trading Houses
ëMarket selection and market research
ëCustomer identification and evaluation
ëCommercial and technical negotiations
ëVendor development
ëProduct/packaging adaptation
ëImports, particularly of items required for export
production
ëProvide protection against export risk
ëFinancial arrangements including securing credit
ëExport documentation and shipping

|
‡Direct Exports
§A firm¶s product is directly sold to 
 -Sole
distributor
§Foreign country based intermediaries--  
§Company owned   '

||


   
   
The basic duty of an agent is to secure orders in the name of and on account of the principal²does
not trade on his own²gets commission on the basis of orders secured.
   
   

‡ Legal stipulation.
‡ Local man-knowledge of the marketing conditions.
‡ Good contacts with decision-makers.
‡ Set-up in major commercial centres-can call personally on main buyers at regular intervals.
‡ Commercial and Trade information relevant to principal¶s product line can be passed on by the
agent with greater speed.
‡ Paid a commission-no fixed or overhead cost.
‡ Well-established agents have warehousing facilities
‡ Has specialized sales staff to handle sales.
‡ Can provide after-sales service.
‡ Easier to appoint an agent compared to importer-distributor. Distributors lock up working capital of
product which does not move at the same rate as it was anticipated. An agent on the other hand
does not risk anything.
|
*  

  
‡ May work for other principals-competitors
‡ For Technical products-may some time find difficult to keep himself informed of
their latest technical merits.
‡ An agent may not put his best-fear the principal may start on his own.
   
   
‡ Indian Embassies/High Commission.
‡ International Merchant Banks.
‡ Chamber of commerce.
‡ Import Promotion Organisation.
‡ International Union of Commercial Agents & Brokers at Amsterdam.
‡ Visiting Trade Fair & Exhibitions.
‡ Inserting Advertisement.

|Ñ
  

  
Selection takes time and effort and calls for good judgment.
Three Qualities of Agents are:
|# (means the agent must have established his credibility.
)#  (must have sound financial base.
*# ( must have contacts in the right places and possess adequate
marketing experience.
' 
  

‡ Question arises on big agency house or smaller one.
‡ Answer depends on level of business the exporter expects to generate.
‡ Small agents-may make sincere attempts to get business and will devote more
attention to promote company¶s product.
‡ Disadvantage-may not have adequate contacts-lack of experience in promoting
technical & specialized products.
‡ Another factor is to find out about competitive and complimentary product-for
complimentary products agents will have wide contacts.
|D

 
  
‡ How long has the agent been in business ?.
‡ How many salesman has he got ?. Their age and experience.
‡ Does he carry any lines that are directly competitive with or complementary
to the firm¶s line ?.
‡ Total turnover during the last few years.
‡ What is the average turnover per account ?.
‡ Has he got adequate working capital ?.

     
‡ Granting Exclusive Agency Rights
‡ Variable commission rates
‡ Supplying promptly promotional materials and samples
‡ Invite agents to see company¶s operations first hand

|·

  

  
‡ Share of the market the company has secured
‡ How the market share changing?.
‡ Annual rate of growth in sales
‡ Number of new customers
 
 


‡ Purchase foreign exchange from the free market
‡ Alternatively, he can maintain a foreign exchange account (EEFC)

|ü


    
Agency agreement is a legal document which establishes the commercial
relationship between the principal and the agent.
It incorporates the conditions actually agreed upon by the concerned parties for
the conduct of business. When negotiating an agency agreement, the Indian firm
should be careful on certain points. These are :
+  
 
 
+ 
   
 
+ 
    

, 


International buying groups may like to contact the exporter directly. Exporters
should reserve the right to negotiate directly with international buying groups in
his own country for orders which ultimately will be executed in the agents,
territory ± whether the agent will be eligible to commissions on such sales
should be made explicit in the agreement.

|X
 
- 


 
‡ When credit terms are involved and the principal is not sure of the
credit worthiness of the buyer, he should have the right to reject the
order.
‡ Very small order.
 



‡ Rate on which commission will be paid.
‡ Calculated on percentage basis ± the base for such calculation
‡ The time when commission becomes payable-payable only on
realization as per RBI regulations.

|†
 
  
‡ Mechanism for settling disputes should be agreed upon in advance by
both parties and indicated in the agency agreement.
‡ Referring the disputes to arbitration is the best procedure-venue and the
proper law of the agreement.
‡ India as venue and Indian law as the proper law. If not acceptable to the
agent then:
‡ Two possibilities of compromise
a) Venue will be a third country
b) Place of defender

|]
!  . 

‡ Agent is sound then no principal will think of termination.
‡ Problem arises when agent is not effective.
‡ Compensation to be paid to agent.
‡ Minimum turnover clause in agreement.
‡ Agent fails to reach the pre-determined level can be taken as valid
ground of termination.
‡ No terminal compensation becomes payable.


Company owned sales offices
‡ Many companies export directly to their own sales
subsidiaries abroad, side-stepping independent
intermediaries

‡ Sales subsidiary assumes the role of the independent

distributor by stocking the manufacturers products ,selling
to buyers, and assuming the credit risk

‡ The sales- subsidiary offers the manufacturer full control

of selling operations in a foreign market

‡ Example²General Motors exports its Saturn cars to Japan

through two of its sales subsidiaries. It side stepped
Yanase, its Japanese importer. Its vigorous marketing|effort
made it possible to sign up 20 dealers in one year.

 
  
  
 

  
 
*
‡ A company assigns the right to a   (which protects a product,

technology or process) or a  ( which protects a product

name) to another company for a 
 

‡ Licenser gives 

"     "  and also

    (unlike contract Manufacturing)


‡ Licensee gains marketing right- Exclusive basis or

Unrestricted basis

‡ Variety of time period 5 to 15 years

‡ Licensee makes all capital investments

‡ Licensing agreements subject to negotiation ±vary from

Co. to Co. and industries to industries

Ñ

 
 *
‡ Developed countries, enjoying competitive advantage in
proprietary technology and own majority global brands are
beneficiaries of international licensing--Shelved technology
‡ A company may not have knowledge or time to engage
actively in international marketing
‡ Market potential comparatively small
‡ Limited resource- Company gains advantage with foreign
partner
‡ Licensing saves capital- no additional investment is
necessary-but also no managerial resources needed

D
‡ Where political and economic risks uncertain-licensing
arrangement provides opportunities to venture into
   

‡ Facilitates rapid penetration in international market for

technology intensive products and processes

‡ Provides access to markets with high levels of tariffs and

non-tariff barriers

‡ Mattel Co of US licensing arrangement in Japan

·
%   
 *
‡Co has to depend on local licensee µs marketing effort

‡Uncertainty of maintaining quality products by local licensee

‡Licensee may turn to be a competitor after expiry of license

‡Royalty is generally lower than profits 3-5 percent

ü
 International Franchising
‡ A special form of licensing in which a home company
(Franchiser) makes a total programme of operation
available to an overseas company (Franchisee)

‡ It includes the brand name, logo, products and method of

operation

‡ Mc. Donald¶s, KFC, Burger King, Holiday INN, Hertz,

Carrefour, Benetton, Coca Cola (trade mark, recipe, and
advertising)-independent bottlers around the world

‡ It is a transfer of the entire system from one country to

another
X
Difference between Licensing and Franchising
*   

Royalty Management Fees

Products are major source of
concern
15-20 years
Licensing tends to be self selecting.
They are often established businesses
and can demonstrate that they are in a
strong position to operate the license
in question.
A licensee can often pass a license
to an associate with little or no
reference back to the original licensor.
Covers all aspects of business
including goodwill, trade
marks, IPR etc
5/10 Years ± renewable
The franchisee is selected by
the franchiser. Even
replacement is controlled by
franchiser.
†
Concerned with specific Franchisor passes to the
existing products and franchisee the benefits of
technologies on-going research programs
.  



!  
 
  




    
    


! " 
 
 
    
 

 /




!
Licensee enjoys substantial Standard fee structure. Any
measure of fee negotiation variation will cause
confusion
Lesser control Exerts higher control

]
Overseas Turnkey Projects
‡ Companies utilize technical expertise to enter
international markets
‡ Types of Turnkey Projects
- Build and Transfer (Conceptualizes, designs,
builds, testing and transfer the project to the
owner
- Build/Operate and transfer (BOT) (Build the
project and manage for the contracted period
before transferring to the foreign owner)

Ñ
 - Build, operate, own (BOO) (Firm buys the project,
once it has been built)
‡ How turnkey projects are awarded
- Contracts for large scale turnkey projects are awarded
on the basis of competitive international bidding
- Projects are funded by international financial
institutions ± ADB, world bank etc.
Air conditioning of Hong Kong airport, Etisalat
Building in Sharjah by Voltas, L&T, EIL

Ñ|
International Management Contracts

‡ Company provides its technical and managerial expertise for

a specific duration to an overseas firm.
‡ Low risk, low cost mode of entry.
‡ Earn foreign exchange and optimally utilize its skilled
manpower
‡ Good scope in Africa, Latin American countries and CIS
‡ IOC ± manages aviation stations in Bhutan, Maldives
Oberoi Hotels in Africa

я
Strategic Alliance
‡ Refers to the relationship between two or more firms that
cooperate with each other to achieve common goals but do not
form a separate company.
‡ Firms focus on their core competencies
‡ Difference between strategic alliance and joint venture
- In Joint Venture two partners contribute a fixed amount of
resources and the venture develops on its own

Joint Venture
Parent Company X
Company Z
(Joint Venture)
Parent Company Y
ÑÑ
-In strategic alliance each partner brings a particular skill or
resource ± usually they are complementary and by joining
forces each expects to profit from the other¶s experience-No
equity participation
Strategic Alliance

Contractual
Company X Company Y
Agreement

ÑD
Benefits of Strategic Alliance

‡ Encourage cooperation with competitors to make use

of their specific strengths.
‡ Cost of investment for market entry is shared
‡ Give access to the distribution channels of partner
firms
Types of Alliance

Alliances involved either distribution access or

technology transfers .

Ñ·
Distribution Access

‡ Exporter uses overseas distribution channel of another

firm
‡ Exporting company is known as a   ± foreign
company with established distribution channel is
known as a 
‡ Products are from unrelated companies that are
complementary (allied) but non-competitive A common
practice in piggy backing is that the rider retains its
branding. The market promotion activity is carried out
with mutual consent

Ñü
Advantages
‡ Allows rider access to overseas market without
establishing own distribution channel
‡ Gives rider a chance to learn and understand the entire
process which assists later setting up own channels
‡ Helps carrier to      
! 
  by
offering wider product range

ÑX
Limitations
‡ Carrier ± concern about quality continuity of supply.
Rider ± handing over full control of distribution to
carrier which may not be compatible with firms long
term marketing goal.

ц
Examples
‡ Wrigley¶s (US based chewing gum company) entered
Indian markets using Parry¶s distribution network.
‡ Tanishq in India has company controlled retail outlets in
India ± has tied up with High Glow jewelry to use its retail
distribution channel in USA.
‡ Tata Motors launched its range of Indica cars in UK under
brand name City Rover using marketing channel of M G
Rover Group-which has strategic strength in marketing
having wholly owned sales organizations in Europe
including U K .

Ñ]
‡ MG Rover identified the need to introduce a small car
which would target the CITY Car sector- Tata Indica
fitted the Co¶s requirement as the basis of CITY ROVER
‡ Smirnoff and Pepsi
‡ Nestle has strategic alliance with Coca Cola to market its
Ready ±to- drink coffee and tea under brand names
Nescafe and Nestea

Technology Alliance
Biotech and Pharmaceutical industry

D
‡ To develop medicine market in Poland Ranbaxy has
forced strategic alliance with Smithkline and Schnarz
Pharma

D|
Contract Manufacturing
‡ An international firm arranges to have its
products manufactured by an




 on contractual basis
‡ Local manufacturers responsibility is only
production
‡ Marketing responsibility is on Parent
company
‡ 0
     ± change contracted
manufacturers to improve quality and cost
effectiveness
‡ A number of global companies outsource
manufacturing activities to
! 

D

 
#
‡ Globalization of business technologies and increasing
pressure on international 

  
  
in 
 " 

 "  to bring new products ±
driving force of international contract manufacturing
‡


 

  
 
 

 
    like China, Korea,
Mexico, Thailand, Taiwan, Now Indonesia, Vietnam and
India
‡ E.g. Taiwan ± world leader in semi conductors, China ±
30% AC, 24% washing machines, 16% refrigerators sold
in the USA. Nike shoe ± entirely manufactures through
contractual basis

DÑ
Example :
1. Chrysler has contract manufacturing arrangement with
Daimler-Punch an Austrian group to build its jeep
Cherokee model under contract of yearly volume of 47,000
± Chrysler supplies stamped metal parts
2. French Shoe company in China and Indonesia
3. Nike entire production is on contract manufacturing.
Likewise Reebok, Adidas etc, Electronic industry in USA
and Europe

DD
Local Manufacturing
‡ A common and widely practiced form of
entry is local production of company¶s
products.
Types:
‡ Overseas Assembling
‡ Joint Venture
‡ Wholly Owned Subsidiaries

D·
Reasons for Local Production
‡Local cost, market size, tariffs, laws and political
consideration may affect a choice to manufacture locally
‡ Sometimes cost cutting rather than market entry ±
International firms establish plants in Taiwan, Malaysia,
Vietnam, China ± little intention to enter the market ±
export to third country

Dü
 



 
‡ Tata Tea entered into JV with Tetley group,
UK in 1994,acquired Tetley in 2000
‡ Asian paints has 27 manufacturing plants in
24 countries
‡ Aditya Birla Group has wholly owned
manufacturing base in south east Asia

DX
D†
‡ Establishing local operation to gain new business
ù An aggressive strategy ± a strong commitment in international
operation ± often the only way to convince clients to switch
suppliers
ù Important strategy in industrial market ± service and reliability
of supply main factors in the choice of suppliers

‡ Establishing Foreign production to defend existing business

ù Changing economic or political factors necessitate such a move
ùE.g. Japanese car manufacturers, that had been subject to an
import limitations of assembled cars, from USA imported from
Japan, began to build factories in USA to protect their market.
ù In 1982 Honda became the first Japanese manufacturer to set up
D]
production in USA
‡ Moving with established customer
ù In many industries, important suppliers keep a relationship by
establishing plants near customer locations ± when customers build
new plants elsewhere, suppliers move too particularly among Car
manufacturers and part suppliers

‡ Ownership Strategy
ù Company¶s entering a foreign market have to decide on
more than the most suitable entry strategy ± WOS or JV

·
Assembly
‡ A firm locates a portion of the manufacturing process in
the foreign country
‡ Assembling consist of the last stage of the manufacturing
and depends on a ready supply of components or
manufactured parts to be shipped from another country
‡ Involves heavy use of labor rather than expensive
investment of capital outlets

·|
‡ In order to save in shipping costs and high import tariffs
and counter non tariff barriers and take advantage of cheap
labour cos exports components in CKD condition and
assembles them overseas e.g Mahindra &Mahindra, has
entered Kenya by assembling operation
‡ Tata motors assembling operations with Nita Company Ltd
in Bangladesh for commercial vehicles
‡ Japanese automobile cos have entered European market by
assembling to overcome import barriers
‡ Sometimes Cos may use some of the local resources

·
Joint Venture
Under a joint venture arrangement a foreign company
invites an outside partner to share stock ownership in the
new unit ±minority or majority or 50:50share

Reasons for JV
‡ By bringing in new partner , company share the risk for a
new venture
‡ JV partner may have important skills or contacts of value to
the firm
‡ Local firm has good contacts with the government and
represents local business interests
‡ Provide greater control over production and marketing
·Ñ
functions
Examples: During 1960-70 Japanese market was viewed as a
difficult environment²govt regulations²JV
Mc Donald¶s entered Japan in 1971 through JV with Fujita
&Co
Mc Donald¶s in India through JV

·D
Wholly -owned foreign subsidiaries
‡ In order to have complete control and ownership of
international operations, a firm opts for foreign direct
investment to own foreign operations.
‡ Benefits
ù Develops a foreign market with growth potential by
way of product differentiation and competitive
response
ù Helps in overcoming import barriers-high tariffs,
quota
ù Gets benefits of incentives provided by host countries
ù Helps a firm to spread risks over various markets
ù Take advantage of lower cost of production in host
countries²raw material. labour
ù Avoids conflicts with overseas partners ··
‡Limitations:
§ Need substantial financial and other operational
resources
§ Need substantial international exposure before
establishing WOS.

‡ Ways of establishing WOS

§ Acquisition
§ Greenfield operation

·ü
‡ Acquisition
‡ A company can acquire a foreign company and all its
resources in a foreign market
‡ Acquisition provides speedy access to the resources of a
foreign company such as skilled man power , the
company¶s product and brand and its distribution
channels
‡ Green field operation
‡ The firm creates the production and marketing facilities
on its own from scratch
‡ Green field operations preferred under following
situations
§ Smaller firms with limited resources
§ Have the option of selecting own location on the basis of
·X
their own screening criteria Example page 47
·†