STRATEGIC TRADE OFFS IN SELECTING INTERNATIONAL

BUSINESS MODES

STRATEGIC TRADE OFFS IN SELECTING INTERNATIONAL

BUSINESS MODES

Introduction One of the most important strategic decisions in

international business is the mode of entering the foreign market.

On one extreme, a company may do the complete manufacturing of the product domestically and export it to the foreign market.

On the other extreme, a company may do by itself, the complete manufacturing of the product to be marketed in the foreign market there itself.

There are several alternatives in between these two extremes.

The choice of the most suitable alternative is based on the relevant factors related to the company and the foreign market.

Important foreign market strategies are a follows:

Exporting Licensing/franchising Contract Manufacturing Management Contracting Fully owned manufacturing facilities. Joint ventures Third country location Mergers and acquisitions

Going it Alone: ExportingGoing it Alone: ExportingHOME COUNTRY HOST COUNTRY

Export of Goods

MNE(Multi National Enterprise)

Revenues

Customers

Going it Alone: ExportAdvantages

Low initial investment Reach customers quickly Complete control over

production Benefit of learning for

future expansion

Disadvantages Potential costs of trade

barriers Transportation cost Tariffs and quotas

Foregoes potential location economies

Difficult to respond to customer needs well

When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucial

In Indian Context Several Indian Companies have entered foreign

markets targeting their exports at the ethnic population. Examples: Mumbai based American Dry Fruits (ADF) sells its

range of packaged foods like chutneys, spices, canned vegetables, ready to eat dals to countries with large Indian Population.

Several firms in Kerela export processed spices, rice powder etc.

Raymonds and Birla VXl have a number of showrooms in West Asia to sell their range of textie items.

Licensing AgreementLicensing Agreement

Local Firm

Licensing of TechnologyHOME COUNTRY HOST COUNTRY

MNE

Fees and Royalties

Licensing AgreementAdvantages

Low initial investment Avoids trade barriers Potential for utilizing

location economies Access to local

knowledge Easier to respond to

customer needs

Disadvantages Lack of control over

operations Difficulty in transferring tacit

knowledge Negotiation of a transfer price Monitoring transfer outcome

Potential for creating a competitor

When Is Licensing Appropriate? Well codified knowledge Strong property rights regime Location advantage

In Indian Context A number of foreign companies have entered the

Indian market, both industrial and consumer goods, by licensing.

Examples: The IFB washing machine, was manufactured in

India, under license from Bosch of Germany. In early 2003, US apparel giant Tommy Hilfiger

Corporation entered into a licensing agreement with the Arvind Group to market the Tommy Hilfiger brand in India.

Franchising  Under franchising an independent organization

called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor.

The franchisor provides the right to use trade marks, operating System, product reputation and continuous support system like advertising, employee training etc.

There are two major franchising types: 1.Product and trade name franchising.

2. Business format “package” franchising 

Contract Manufacturing

ADVANTAGES Company does not have to

commit resources for setting up production facilities.

Cost of product obtained by contract manufacturing is lower than if it were manufactured by the international firm.

It is a less risky way to start with, if the business does not sufficiently pick up, dropping it is easy.

DISADVANTAGES Less control over

manufacturing process.

Has the risk of developing potential competitors.

Not suitable in cases of high tech products and cases which involve technical secrets.

Under contract manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture and assemble the products while retaining the responsibility of marketing the products.

In Indian context There are a number of multinationals and affiliates of

multinationals which employ this strategy in India like Park Davis, Hindustan Lever, Ponds, etc.

Due to availability of excess capacity with some soap manufacturers enabled several foreign companies to experiment with new brand of toile soaps in India. For example, Godrej soaps manufactured Dettol for Reckitt and Coleman, Johnson’s Baby Soap for Johnson and Johnson and Ponds Dreamflower, Cold cream and Sandlewood for Ponds.

Management ContractManagement Contract

Management Fees

Local Firm

Technological Inputs

HOME COUNTRY HOST COUNTRY

Profit

MNE

Wholly-Owned Subsidiary

Managerial Service

Management ContractAdvantages

Access to local management skills

Avoids buying unwanted assets

Retains strategic control

Disadvantages Potential incentive

problem Potential adverse

selection problem How do you know the

competencies of the manager?

When Is a Management Contract Appropriate? Management has a reputation to protect

Hotels Consulting companies

Performance-based contract provides no perverse incentives

In Indian Context Some Indian companies – Tata Tea, Harrisons

Malayalam and AVT- have contracts to manage a number of plantations in Sri Lanka.

Fully owned manufacturing facilities or “Green Field” EntryFully owned manufacturing facilities or “Green Field” Entry

New Subsidiary Company

Investment

HOME COUNTRY HOST COUNTRY

MNEProfit

Going it Alone: “Green Field” EntryAdvantages

Normally feasible Avoids risk of

overpayment Avoids problem of

integration Still retains full

control

Disadvantages Slower startup Requires knowledge

of foreign management

High risk and high commitment

When Is “Green Field” Entry Appropriate? Lack of proper acquisition target In-house local expertise Embedded competitive advantage

In Indian context Mercedes Benz has a production facility in Pune,

India and BMW has in Chennai, India.

Joint VentureJoint Venture

Joint Venture Company

Inputs

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Inputs

Share of Profit

Share of Profit

Joint VentureAdvantages

Access to partner’s local knowledge

Reduction of concern about overpayment

Both parties have some performance incentives

Significant control over operation

Disadvantages Potential loss of

proprietary knowledge Potential conflicts

between partners Neither partner has full

performance incentive Neither partner has full

control

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs Large expected mutual gains in the long-run Trade secrets can be walled off

In indian Context Toyota Motor Corporation entered India in 1997 in

a joint venture with the Kirloskar Group. Joint venture between Bharti Airtel and Alcatel

Lucent for managing Airtel’s Broadband and Landline networks.

Third Country Location Third country location is used as an entry strategy

when there is no commercial transactions between two nations because of political reasons.

In such a situation a firm in one of those countries which wants to enter the other market will have to operate from the third country.

In Indian Context Rank Xerox found it convenient to enter USSR

through its Indian Joint venture Modi Xerox, because of India’s friendly relations with USSR.

Mergers and Acquisitions  A domestic company selects a foreign company

and merger itself with foreign company in order to enter international business.

Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. It provides immediate access to international manufacturing facilities and marketing network.

In Indian Context Foreign MNC’s have been using M&A’ as a

marketing strategy. The soft drinks industry witnessed the use of M&A to

increase market Share and shrink Competition. The French Cement Major Lafarge has moved on to

strengthen its position by acquiring Raymond’s cement unit for Rs. 785 Crore.

A very important foreign acquisition by India has been the buy out of Tetley by Tata Tea for RS. 1870 Crore.

Tata Motors acquired Jaguar land Rover in 2008.

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