RD 3

CHAPTER

INTERNATIONAL BUSINESS
Referred by Charles W.L. HILL, Arun K Jain Dr.R.Chandaran.

GLOBAL MARKET ENTRY STRATEGIES

International Markets provide a wide range of opportunities compared to domestic markets. But global business in inherently more risky than domestic business. However the firm prefers to go International. MODES OF ENTRY Companies desiring to enter the foreign markets, face the dilemma while deciding the method of entry into a given overseas location. Companies can reduce the dilemma by considering the above factors.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(1) EXPORTS: Many manufacturing firms begin their global expansion as Exporters. And later switch to another mode for serving a foreign market. Export deals with physical movement of goods & services from one country to another country following the rules of both the country. Exports can be classified as (A) Direct Export & (B) Indirect Export. (A) Direct Export : Direct Exporting means exporting the products in a foreign country country directly through its distribution arrangements. (B) Indirect Export : Indirect Exporting means exporting the products to the foreign country with the help of another middlemen. Lack of international contacts, lack of expertise they become indirect exporters.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

Advantage of Exporting (1) Need for Limited Finance. (2) Less risk. (3) By manufacturing the product in a centralized location and exporting it to other national markets, the firm gain economies of scale. Example: (1) This is how Sony came to dominate the global TV market. (2) How many Japanese Automakers made inroads into the U.S. market. & (3) How South Korean firms such as Samsung gained market share in Computer memory chips. (4) How Matsushita came to dominate the VCR market,

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

Disadvantage of Exporting
(1) Exporting from the firms base may not be appropriate if lower cost locations for manufacturing the product can be found abroad.

(2) High Transportation costs can make exporting uneconomical, particularly for bulk products.
Example: Many Multinational Chemical firms manufacture their products regionally, serving several countries from one facility. (3) Tariff barriers by the host country government can make exporting uneconomical & very risky.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(2) LICENSING
A Licensing agreement is an arrangement where by a licensor grants the rights to intangible property to another entity (the Licensee) for a specified period, and in return , the Licensor receives a royalty fee from the licensee. Intangible property includes Patents, Inventions, Formulas, Processes, designs, Copyrights & Trademarks. For Example: (1) British American Tobacco Company (BATS) has given licenses in many countries for the manufacture of their brand of cigarettes 555. In India, ITC is the licensed producer of 555.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

Example:
(2) Pepsi Cola granted license to Heineken of the Netherlands giving them the exclusive right to produce & sell Pepsi Cola in the Netherlands.
The Licensor has minimum involvement in day to day functions. Therefore, the returns are also comparatively low. Advantages of Licensing (1) Licensing is very attractive for firms lacking the capital to develop operations overseas. (2) Another advantage of licensing is that the firm does not have to bear the development costs & risks associated with opening a foreign market. .

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(3) Licensing is also often used when a firm wishes to participate in a foreign market but is prohibited form doing so by barriers to investment. This was one of the original reasons for the formation of the Fuji Xerox joint venture in 1962. Xerox wanted to participate in the Japanese market but was prohibited from setting up a wholly owned subsidiary by the Japanese government. So Xerox set up the joint venture with Fuji & then licensed its know how to the joint venture.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(4) Finally, licensing is frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself. For example: Bell Laboratories at AT&T originally invented the transistor circuit in the 1950s but AT&T decided it did not want to produce transistors, so it licensed the technology to a number of other companies, such as Texas Instruments. Similarly, Coca-Cola has licensed its famous trademark to clothing manufacturers, which have incorporated the design into clothing.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

DISADVANTAGES OF LICENSING (1) It does not give a firm the tight control over manufacturing, marketing & strategy that is required for realizing experience curve and location economies. (2) Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another.

Licensing limits a firms ability to do this.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(3) FRANCHISING Franchising is similar to licensing, although franchising tends to involve longer term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property (normally trade mark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchiser receives a royalty payment . Licensing is pursued primarily by manufacturing firms, Franchising is employed primarily by service firms. Example:(1) Mc Donalds is a good example of a firm that grown by using a franchising strategy.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

Example: Dominos Pizza & KFC are the known franchise brands. NIIT & APTECH have appointed franchisees in Africa, South East Asia, Gulf Countries & china. Hotels like The Hilton and Marriott are well known operators in the hotel sector. Advantages of Frachising: (1) The advantages of franchising as an entry mode are very similar to those of licensing. The firm is relieved of many of the costs and risks of opening a foreign market on its own. (2) Thus Using a Franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk, as McDonalds has.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

JOINT VENTURES A Joint Venture is a binding contract between two venture partners to set up a project either in the home country or host country or a third country. In this case both parties are committed to joint risk taking & joint profit sharing. Establishing a Joint venture with a foreign firm has long been a popular mode for entering a new market. For Example: The Taj group of hotels has a joint venture in Russia for setting up five star hotels. Mahindra & Mahindra has recently entered into a joint venture with Renault to manufacture cars.

ADVANTAGES OF JOINT VENTURES: (1) A Firm benefits from a local partners knowledge of the host countrys competitive conditions, culture, language, political systems, and business systems. Example: Thus, for many U.S. firms Joint Ventures have involved the U.S. company providing Technological know- how & products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country. (2) When the Development costs & risks of opening a foreign market are high, a firm might gain by sharing these costs & risks with local partner. (3) In many countries, political considerations make joint ventures the only feasible entry mode. Research suggests joint ventures with local partners face a low risk of being subject to nationalization or other forms of adverse government interference. (4) JV partner may also have important skills or contracts of value to the International firm.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

DISADVANTAGE OF JOINT VENTURE: (1) LACK OF CONTROL OVER TECHNOLOGY. A firm that enters into a joint venture risks giving control of its technology to its partner. Example: Thus a proposed Joint venture in 2002 between Boeing & Mitsubishi Heavy Industries to build a new wide body jet, raised fears that Boeing might unwittingly give away its commercial airline technology to the Japanese. (2) Joint Ventures result in disputes between or among parties due to varied interests. For the sake of control between the investing firms if their goals & objectives change or if they take different views as to what the strategy should be. (3) Decision making is normally slowed down in Joint Venture due to the involvement of a number of parties.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

TRUNKEY PROJECTS The Term Trunkey means exporting process technology to other countries. Trunkey operations are a type of collaborative arrangement in which one company contracts another to build complete, ready to operate facilities. It covers right from the supply of man power, capital, erection of the plant, installation & commissioning up to the trail operation of a project. At completion of the contract, the foreign client is handed the key to a plant that is ready for full operation. Companies building Trunkey operations are frequently industrial equipment manufacturers and construction companies. Today Infrastructure projects like Power Plants, Airports, Refineries, Railway lines, Highways & Dams are undertaken on a Trunkey basis. Bechtel, Brown Bovery, Hyundai, Mitsubishi, L&T & Daewoo are Trunkey contractors for International projects.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

The Trunkey project contractors either get a fixed fee or the cost plus profits are collected over a period of time. ADVANTAGES OF TRUNKEY PROJECTS The know how required to assemble & run a technologically complex process, such as Refining, Petroleum or Steel is a valuable asset. Trunkey Projects are a way of earning great economic returns from that asset. This strategy is particularly useful where FDI is limited by Host government regulations. For example The government of many oil rich countries have set out to build their own petroleum refining industries, so they restrict FDI in their oil & refining sectors. But lack of technology they gain it by entering into Trunkey projects with foreign firms that have the technology.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

DISADVANTAGES OF TRUNKEY PROEJCTS The firm that enters into a Trunkey project with a foreign enterprise may inadvertently create a competitor. For example: Many of the Western firms that sold oil refining technology to firms in Saudi Arabia, Kuwait, & other Gulf states now find themselves competing with these firms in the world oil market.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

CONTRACT MANUFACTURING Many companies outsource their products & Concentrate mainly on marketing operations. Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a competitive price in any part of the world. The Manufacturing responsibility is restricted to production. This method is executed where production technology is easily available every where & importance should be given to marketing & promotion, distribution of the goods & services. Example: (1)Nike is procuring its Athletic Footwear in a number of factories in South East Asia. (2) Mega Toys is sourcing form China. (3) Hundreds of International companies with their origin in European countries have selected manufacturing centre's in India, China & South East Asia.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

ADVANTAGES OF CONTRACT MANUFACTURING

(1) It reduces cost of production as the host countrys companies with their relative cost advantage produce at low cost.
(2) Small & Medium industrial units in the host country can also develop as most of the production activities take in the units. (3) The International Company gets the locational advantages generated by the host countrys production. (4) International business can focus on competence.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

DISADVANTAGES OF CONTRACT MANUFACTURING (1) Host Countrys companies may not strictly adhere to the production design, quality problems as per the standards of the International companies. (2) The poor working countries in the Host country affect the companys image. For example: Nike has suffered the same problem due to the reports of unsafe & harsh working conditions in VIETNAMESE factories churning our Nike Footwear.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

FOREIGN DIRECT INVESTMENT The flow of funds from one destination to another is called Investment. Companies which are constantly involved in International business, Invest their money in manufacturing & marketing bases through ownership & control. Example:

Kellogg, Pepsi, Coca Cola & the Hyatt Group of hotels are willing to invest even if the profits are returned after a long gestation period.

Generally, Foreign Investment takes place on full swing in developing countries only in the past two decades. China, Taiwan, India, Brazil, Argentina & other developing countries have started attracting huge Foreign Investment in specific sectors like Infrastructure, Mining, Marine technology & Agro processing. ADANTAGES OF FOREIGN DIRECT INVESTMENT High Profit potential. Maintain control over operations. Avoid tariffs. Acquire knowledge of local market. DISADVANTAGES OF FDI: High exposure to political risk. Vulnerable to restrictions to foreign investment. Greater Managerial Complexity.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

(1) (2) (3) (4) (1) (2) (3)

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

MERGERS AND ACQUISTIONS A Domestic company selects a Foreign company and merge itself with it. In order to enter International Business. Here the domestic company purchase the foreign company and acquire its ownership & control.

Example: 1. Proctor & Gamble entered Mexico and became leaders in 5 yrs by acquiring Loreto. 2. Coca-Cola entered Indian market instantly by acquiring the Parle and its Bottling units.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

ADVANTAGES OF MERGERS & ACQUISTIONS: (1) A Company gets instant access to market & distribution network. (2) This mode of entry gives an Outstanding Competitive edge over others. Such companies strengthen their International manufacturing facilities & marketing network. (3) Access to new Technology becomes easy. DISADVANTAGES OF MERGERS & ACQUISTIONS 1. It is complex task involving banks, lawyers, bureaucrats & obviously politicians. 2. The host country may impose restrictions on acquisitions. 3. The labour problem is a major challenge to acquisitions specially in developing countries where unemployment is a crucial issue.

DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS

MANAGEMENT CONTRACTS Companies with a low level of technology and Managerial expertise may seek the assistance of foreign companies. A Management contract is an agreement between two companies whereby one company provides managerial & technical assistance for which proper monetary compensation is given, or share in the profits, or a percentage on the sales. Example: Delta Airlines, Air France & KLM offer such services in developing countries. Exxon is a major operator in the Gulf region in the field of Oil exploration.

ASSEMBLY OPERATIONS
By Assembly Operations, the International firm locates a portion of the manufacturing process in the foreign country. Assembly consists only of the last stages of manufacturing & depends on the ready supply of manufactured or Components parts to be shipped in from Another country. Example: (1) Motor vehicle manufacturers have made extensive use of assembly operations in numerous countries. (2) General Motors has maintained major integrated production units only in the U.S., Germany, U.K. BRAZIL and AUSTRALIA. (3) In many countries, disassembled vehicles arrive in assembly operations that produce the final product on the spot. Assembling the cars in Local markets is also used extensively by Ford Motor company, American Motors jeep subsidiary & most European & Japanese Car manufacturers.

ASSEMBLY OPERATIONS
Assembly usually involves heavy use of labour rather than extensive investment in capital outlays or equipment. The companies take the advantage of low range costs by shifting the labour intensive operation to the foreign market. The results in a lower final price of the products. In many cases, it is the local government that forces the setting up of assembly operations by sometimes banning the Imports of fully assembled products by charging excessive tariffs on imports.

INTEGRATED LOCAL PRODUCTION OPERATIONS

Since the building of a plant involves a substantial outlay in capital, Companies only do so where demand appears assured. Many number of reasons for establishing factories countries, the primary reason is take advantage of lower costs in a country, thus providing a better basis for competing with other foreign companies already present. (1) ESTABLISHING LOCAL OPERATIONS TO GAIN NEW BUSINESS Some companies want to build a plant to gain new business and customers. It is done as a local production commitment represents a strong commitment and is often the only way to convince clients to switch suppliers. This is particularly important in Industrial markets where service reliability are main factors determining product or supplier choice.

INTEGRATED LOCAL PRODUCTION OPERATIONS

(2) ESTABLISHING FOREIGN PRODUCTION TO DEFINE EXISTING BUSINESS Companies establish production abroad not to enter new markets but to protect what they have already gained. Changing economic or political factors may make such a move necessary. Example: The Japanese car manufacturers who had been subject to an import limitations of a Assembled cars imported from Japan, begin in the 1980s to build factories in the U.S. to protect their market share.

INTEGRATED LOCAL PRODUCTION OPERATIONS

(3) MOVING WITH AN ESTABLISHED CUSTOMER Moving with an established customer can also be a reason for setting up plants abroad. In many industries, important suppliers want to keep their relationship establishing plants near customer locations, and when customers build new plants elsewhere, suppliers move too. The Automobile Industry with its network of hundreds of Component suppliers feeding into the assembly plants is a good example of how companies follow customers. (4) SHIFTING PRODUCTION ABROAD TO SAVE COSTS Companies in order to cut costs shift its productions abroad.