Modes of entry

Group Members

• MANDARY Tejusvi Maheshee

• BUROTY Priya Soohashenee

• ARIA NAICK Keshav

• BUNDHOO Tinadevi

• JAGUESSUR Yasthanandsingh

Examples in the Business ContextMode of Entry

Franchising

Licensing

Wholly Owned Subsidiary

Exporting

Turnkey Project

? ?

Using examples from the business context, evaluate the mode of

entry adopted by firms.

Entering a new market is always a risky business, with a big risk of failure.

Mode of Entry

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.

3 Main Categories of Mode of Entry

Export

• Direct Export

• Indirect Export

Contractual

• Turnkey Projects

• Licensing• Franchising

Investment

• Joint Venture

• Wholly owned subsidiary

Exporting

Frequently employed mode of internationalization.

One of the simplest and most

common approaches adopted by firms in their endeavour to enter foreign markets.

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.

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.

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

Direct Export

This mode gives the company a greater degree of control over its distribution channels.

Indirect Exporting

This mode is seen as a good way of gaining knowledge

about a potentially interesting market.

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.

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

Advantage

No high resource commitment in the targeted country

Inexpensive way to gain experiential knowledge in foreign markets

Disadvantage

※Export, although rewarding, is generally an expensive activity which require additional financial resources.

Toyota (Australia)

One of Australia's leading automotive companies.

A leading manufacturer, distributor and exporter of vehicles

Market share of 18 % in 2011

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.

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.

Advantage

Low-cost strategy to expand sales in order to achieve economies of scale

Disadvantages

※Hard to control operations abroad

※Provides very small experiential knowledge in foreign markets

2nd Type of Mode of Entry

Cont

ract

ual •Turnkey Project

• Licensing

• Franchising

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.

Turnkey Projects The turnkey contractor is responsible

for the – Design

– Construction

– Installation of a new plant

– Maintenance of the plant ( in some cases)

At the completion of

the contract, the foreign company

gives the “key” to the project

and it is ready for operation.

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

Larsen and Toubro Ltd

Source: http://www.ibef.org/download/Larsen_%26_Toubro.pdf

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/

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.

Advantages

Seek the economic gains without the political complications

Earn profits in a foreign country

Possibility to establish a plant

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

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)

It is to be noted that, a royalty fee is given to the licensor.

Oracle Corporation

An American multinational computer technology corporation

Specializes in developing and marketing hardware systems and enterprise software products.

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.

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

Has licensed its famous trademark to clothing manufacturers, which have incorporated the design into their clothing.

Coca-Cola

Advantages

Speedy entry to foreign market

Marketing of the brand

Can be used as a step towards a more committed mode of entry

Disadvantages

• Hard to monitor partners in foreign markets

• Hard to enforce agreements

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’.

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

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).

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.

The management of Pizza Hut believes that that each franchise brings

Unique insights

Skills

Experiences from diverse backgrounds.

Source: http://www.pizzahutfranchise.com/

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.

Advantages

Speedy entry to foreign market

Requires a moderate resource commitment in the targeted country

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:

Source: http://www.pizzahutfranchise.com

BATA

One of the world's leading footwear retailers and manufacturers

Source: http://www.bata.com/

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/

Advantages

Speedy entry to foreign market

Moderate-cost strategy to expand sales in order to achieve economies of scale

Disadvantages

Does not provide experiential knowledge in foreign markets

High potential for opportunism

High monitoring costs

3rd Type of Mode of Entry

Inve

stm

ent •Joint Venture

• Wholly Owned Subsidiary

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.’

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

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

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)

Apollo Hospitals Group

The largest healthcare group in Asia

With more than 7,500 beds in 43 hospitals

16 million patients from 55 countries

Apollo Group of Hospital

India and Parkway Health of Singapore

Apollo Gleneagles Hospitals

Apollo Group of Hospital

Munich Health

(Germany)

Apollo Munich

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

Advantages

Technology sharing and joint product development

Reduce political and economic risks as a result of the involvement of the native partner

Disadvantages

Mistrust over proprietary knowledge

Performance ambiguity - how to split the pie

Toyota Mauritius

Toyota Tsusho

Corporation

Beechand Company

Toyota Mauritius

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.

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

Disadvantages

Lack of parent firm support

Performance ambiguity - how to split the pie

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

Two options

Wholly Owned Subsidiary

Greenfield Investment Acquisition

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

HOW? By transferring its

technology,

supply chain

organizational structure, and

Corporate culture. (Hennart and Park 1993)

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.

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)

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

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.

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

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

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.

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

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

Disadvantages

Managers of acquired foreign subsidiaries may have a weak attachment to the parent firm

CONCLUSION

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

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

Oracle

Licensing

Acquisitions

Greenfield Investment

Life Insurance Corporation

Joint Ventures

Greenfield Investment

Toyota Corporation

Export

Joint Ventures

Greenfield Investment

Apollo Group Hospitals

Franchising

Joint Ventures

Greenfield Investment

If You have any question

Thank You