FINAL Modes of Entry Into an Internataional Mkt

8/2/2019 FINAL Modes of Entry Into an Internataional Mkt

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Let Your Mind Start a Journey Through a

Strange New World.

Leave All Thoughts Of The World You Knew

Before.

Let Your Soul Take You, Where You Long To Be

Close Your Eyes, Let Your Spirit Start To Soar,

And Youll Live As Youve Never Live Before.


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PRESENTED BY:-

SANJAY YADAV


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Growth

Profitability

Achieving economies of scale

Risk spread

Access to imported inputsUniqueness of product or service

Marketing opportunities due to life cycles

Spreading R & D costs


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There are some basic decisions that the firm must take

before foreign expansion like:

which markets to enter

when to enter those markets


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The choice is based on nations long run profit

potential.

Look in detail at economic and political factors

which influence foreign markets.Long run benefits of doing business in a country

depend on following factors:-

Size of market (in terms of demographics)

The present wealth of consumermarkets(purchasing power)

Nature of competition


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It is important to consider the timing of entry. It is saidthat..

Entry is early when an international business enters aforeign market before other foreign firms and late

when it enters after other international businesses. The advantage is when firms enters early in the foreign

market commonly known as first-mover advantages

First mover advantage:-

Its the ability to prevent rivals and capture demand byestablishing a strong brand name.

Ability to build sales volume in that country. So thatthey can drive them out of market.

Ability to create customer relationship


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Exporting

Licensing

Franchising

Turnkey Project

Acquisitions

Amalgamation

Merger

Takeovers

Joint Venture

Wholly Owned Subsidiary

Strategic Alliances

Management Contracts

Free Trade Zones


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A function of international trade whereby goods produced in

one country are shipped to another country for future sale or

trade.

The sale of such goods adds to the producing nation's gross

output. If used for trade, exports are exchanged for other

products or services.

Exports are one of the oldest forms of economic transfer,

and occur on a large scale between nations that have fewer

restrictions on trade, such as tariffs or subsidies.


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Need for limited finance

Less Risks

Motivation for exporting


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Indirect exporting

Direct exporting

Intracorporate transfers


11/482004 Prentice Hall 12-11


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In this mode of entry, the domestic manufacturer

leases the right to use its intellectual property (i.e.)

technology, copy rights, brand name etc to amanufacturer in a foreign country for a fee.

Here the manufacturer in the domestic country is

called licensor and the manufacturer in the foreign

is called licensee.

A licensee ordinarily pays a royalty to the licensor.


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Low investment on the part of licensor.

Low financial risk to the licensor

Licensor can investigate the foreign market

without much effort on his part.

Licensee gets the benefits with less investment on

research and development

Licensee escapes himself from the risk of product

failure.


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It reduces market opportunities for both.

Both parties have to maintain the product quality

and promote the product. Therefore one party can

affect the other through their improper acts.Chance for misunderstanding between the parties.

Chance for leakages of the trade secrets of the

licensor.

Licensee may develop his reputation.

Licensee may sell the product outside the agreed

territory and after the expiry of the contract.


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LICENSOR

Leases the right to use

its intellectual propertyEarns new revenues with

relatively low investment

LICENSEE

Uses the intellectual

property to create

products for local sale

Pays a royalty back to

the licensor

Basic Issues:1. Set the boundaries of the agreement

2. Establish compensation rates

3. Agree on the rights, privileges, and constraints

4. Specify the duration of the agreement


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Trade marks

Operating System

Products

Continuous support system like advertising,employee training, reservation services and

quality assurances program etc.


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Low investment and low risk

Franchisor can get the information regarding the

market culture, customs and environment of the

host country. Franchisor learns more from the experience of the

franchisees.

Franchisee gets the benefits of R& D with low

cost. Franchisee escapes from the risk of product failure.


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International franchising may be more complicated

than domestic franchising.

It is difficult to control the international franchisee.

It reduce the market opportunities for both.

Both the parties have the responsibilities to

maintain product quality and product promotion.

There is a problem of leakage of trade secrets.


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A turnkey project is a contract under which a firm

agrees to fully design , construct and equip amanufacturing/ business /services facility and turn the

project over to the purchase when it is ready for

operation for a remuneration.

The form of remuneration includes. A fixed price

payment on cost plus basis (i.e., total cost incurred plus

profit)

Example : Once Indonesian Govt during 1974 invited

global tenders for construction of sugar factory.


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ACQUISITION

AMALGAMATION MERGER

TAKEOVERS

JOINT VENTURES

STRATEGIC ALLIANCES


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Acquisition is acquiring or purchasing an

existing venture. It is one of the easy

means of expanding a business by

entering new markets or new productareas.

An entrepreneur must be careful is

structuring the payment so that he wouldnot be financially overburdened.


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Tata has recently acquired Jaguar, Land Rover

and Fiat Motors

Videocon acquired Thomson SA of France at

about US $ 290 million.Ranbaxy Labs at a deal of US $ 324 million

acquired Romania based Terapia SA.

Tata Steel acquired UK based Corus Group at adeal value of US $ 12 million.

Fortis Healthcare acquired Hong Kong's Quality

Healthcare Asia Ltd for around Rs 882 Crore


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The company immediately gets the ownership and

control over the acquired firms factories,

employee, technology, brand name and distribution

networks.

The company can formulate international strategy

and generate more revenues.

The method of expansion cost lower than other

methods.The knowledge, skill and expertise of existing

employees will prove to be very beneficial to the

company.


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Acquiring a firm in a foreign country is a complex

task involving bankers, lawyers regulation,

mergers and acquisition specialists from the two

countries.

This strategy adds no capacity to the industry.

Sometimes host countries impose restrictions on

acquisition of local companies by the foreign

companies.Labor problem of the host countrys companies are

also transferred to the acquired company


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Removal of competitor

Reduction of the Companys failure through

spreading risk over a wider range of activities.

The desire to acquire business already tradingin certain markets & possessing certain

specialist employees & equipments.

Obtaining patents, license & intellectualproperty.


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Amalgamation is a restructuring phenomenon in which two or more

companies are liquidated and a new company is formed to acquire

business. In simpler terms, it means that a new company is formed that

buys the business of minimum two companies.

The new company or the acquiring company is known as the

amalgamated company. It acquires the assets and liabilities of the other

companies known as amalgamating company. Commonly, such

companies are also referred as target companies or merging companies.

Amalgamations are considered to be a safe route for sick units who want

to save their existence. Many other companies facing possible bankruptcy

also opt for amalgamations.

Similarly, cash-rich firms that have lot of liquid assets but no profitable

business opportunities aim for it as a long-term investment.


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The most challenging task in any amalgamation is to create a sense of co-

operation among the employees of different amalgamating companies.

Ultimately, the success of any venture depends upon people handling it.

NOTE: In India, mergers and amalgamations are used interchangeably in legal

parlance. However, they are an entirely different accounting treatment. It is a

complicated procedure involving lot of legal, tax, and accounting

considerations Therefore, one need to be very careful while evaluating anamalgamation proposal.

Tax treatment is an important aspect of amalgamation. According to the

Income Tax Act, the amalgamating companies are not liable to pay the capital

gain tax levied on them following their liquidation. The incidence of tax fallson the amalgamated company. Moreover, all expenses related to

amalgamation are not tax-deductible.


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Hindalco targeted Canada to acquire Novelis at US $

5982 million.

Reliance Power and Reliance Natural Resources

combined their operations at a deal of US $11 billion.

ICICI Bank acquired Bank of Rajasthan at about Rs

3000 Crore.

Wipro bought US based Info Crossing at US $ 600

million.

GTL Infrastructure acquired Aircel Towers at US $ 1.8

billion.

Source:http://amalgamation.in/amalgamation-

meaning.htm


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A merger happens when two firms agree to go

forward as a single new company rather than

remain separately owned and operated.

This kind of action is more precisely referredto as a "merger of equals". The firms are often

of about the same size. Both companies' stocks

are surrendered and new company stock is

issued in its place.

TYPES OF MERGERS:

Vertical merger

Horizontal merger


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Vertical merger involves integration of two companiesproducing intermediate products for the same finishedproduct.

Typically, it involves purchase of business of suppliers ordistributors that provide raw materials or semi-finished

goods for the production of a single good. The main aim is to shorten the supply chain and increase the

profit margins. For instance, a two-wheeler manufacturercan purchase a tire company.

Vertical mergers help firms in the same industry to create amonopolistic situation by restricting the supply of inputs toother players, or by providing the inputs at a very high cost.

Moreover, it reduces the dependence on suppliers therebygiving more autonomy to the manufacturing firm.


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Horizontal merger involves a merger between two

firms producing similar goods and services in a market. For instance, two car manufactures, can merge their

business for greater benefits. Presently, most of thecountries have open economies. This has led to cut-throat competition among companies for survival in the

market. Horizontal mergers, therefore, is a strategic initiative

taken by firms to combine their market share to sustainand grow in the market.

Horizontal mergers help firms grow in size, enjoyeconomics of scale, and fight competition from otherfirms.

Such mergers can also be of small companies.


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A company takeover generally refers to the purchase of a

company, partially or wholly, by another company known asthe acquirer.

The main objective of the acquirer is to exercise controlover the management of the target company.

Practically, the acquirer struggles to buy approximately 30percent of the equity held by major shareholders. Theremaining equity holders are too small to refute thetakeover, and they easily surrender their share.

Like other forms of corporate restructuring, takeovers alsohave pros and cons.

On one hand, they are considered to be positive because

they improve the working of management that leads toincreasing productivity, profit margins, and ultimatelymaximizes earnings per share.

On the other hand, it is argued that takeovers loweremployees' morale. They refuse to co-operate and accepttheir new boss.


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When two or more firms join together to create a new

business entity that is legally separate and distinct from its

parents.

It involves shared ownership.

Various environmental factors like social, technological,economic and political encourage the formation of joint

ventures.

Joint Ventures are not permanent.

Example : Hero Honda:- was an joint venture but due to itstemporary nature it is no more a joint venture. Now Honda

is Honda and Hero is Hero moto corp.

Another example is: The most famous joint venture i.e.,

Wall Mart and The Bharti Group.


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Joint venture provides large capital funds suitable

for major projects.

It spread the risk between or among partners.

It provides skills like technical skills, technology,human skills, expertise, and marketing skills.

It makes large projects and turn key projects

feasible and possible.

It synergizes due to combined efforts of variedparties.


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Conflict may arise

Partner delay the decision making once the disputearises. Then the operations become unresponsiveand inefficient.

Life cycle of a joint venture is hindered by manycauses of collapse

Scope for collapse of a joint venture is more due toentry of competitors changes in the partners

strengthThe decision making is slowed down in joint

ventures due to the involvement of a number ofparties.


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Acc to Bronder and Pritzi

strategic alliances in terms of at least twocompanies combining value chain activities for thepurpose of competitive advantage

Examples are:

Technology swaps

R & D exchanges

Distribution relationship

Marketing relationship

Manufacture- supplier relationship

Cross-licensing


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Subsidiary means individual body under parent body.

This Subsidiary or individual body as per their own

generates revenue.

They give their own rent, salary to employees, etc. But

policies and trademark will be implemented from the

Parent body.

There are no branches here.

Only the certain percentage of the profit will be given

to the parent body.


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A subsidiary, in business matters, is an entity

that is controlled by a bigger and more

powerful entity.

The controlled entity is called a company,

corporation, or limited liability company and

the controlling entity is called its parent

company.


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The companies with low level technology and

managerial expertise may seek the assistance of a

foreign company.

Then the foreign company may agree to provide

technical assistance and managerial expertise.

This agreement between two companies is called

Management Contract.


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A FTZs is a tax free area in a particular country

that is not considered part of the respective

country in terms of import regulations and

restrictions.

Product can be shipped to a free trade zone,

undergo additional manufacturing processes, and

then be shipped further to the target market

There are two Free Trade Zone in India Kandla Free Trade Zone

Santacruz Free Trade Zone


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http://amalgamation.in/amalgamation-

meaning.htm

http://www.investopedia.com/university/mergers/

http://www.strategicalliance.org/

http://en.wikipedia.org/wiki/Franchising

http://www.businessdictionary.com/definition/man

agement-contract.html


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I have discussed total 13 modes on entry into the

International market for the entrepreneurs.

With their advantages, disadvantages, reasons andfactors to be considered.

I have used 3 figures to explain three different

modes i.e., Exporting, Licensing and Strategic

Alliance.

I have used a total of 48 slides.


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Documents

FINAL Modes of Entry Into an Internataional Mkt