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Thi Hang Mercy Aku Fateha

Non-Equity Modes to enter International Market

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Thi Hang Mercy AkuFateha

PURPOSES

Understand different non-equity entry modes

How NEMs contribute to competitive advantage of the

company and consider drawbacks that may arise.

NON-EQUITY MODES OF ENTRY

• Defined as modes that do not

entail equity investment by a

foreign entrant,

• Becoming increasingly popular

among service firms for organizing

overseas ventures/operations

• Has low degree of ownership and

Control and extent of investment.

• Less risk than equity entry modes.

LICENSING

• Involves a contractual arrangement whereby a company licenses the rights to certain technological know-how, design, patents, trademarks and intellectual property to a foreign company

• A common method of for companies with a distinctive and legally protected asset,

• Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation.

• Licensee will pay a free which could be a % royalty of sales (normally less than 5%) and a fixed fee.

COCA-COLA

Biggest soft drink company in the world

Has 3000 products and operations in 200 countries.

MERIT

• Brand awareness: Coca Cola senior

managers view licensing as a powerful

marketing term. Coca-Cola is the most

recognised word and recognised by

94% of the world’s population.

• •Gained an additional revenue

opportunity

• •Strengthened their core messaging of

• sustainability

• •Provided increased exposure for the

brand

DEMERIT

• Difficult to use legal redress with business partners to disagreements upon

implementation.

• Revealing secret

• Hard to monitor partners in foreign market

FRANCHISING

• A franchise is an ongoing business relationship where one party ('the franchisor') grants to another ('the franchisee') the right to distribute goods or services using the franchisor’s brand and system in exchange for a fee.

• The Franchisor will retain the intellectual property rights to the recipes, formulas, ways of working or operating the businesses and grant the rights to operate and sell their products or services and brand usage rights to the franchisee in exchange for ‘key money’

• Franchise contractual market entry modes are commonly used in the quick serve restaurant industry

MCDONALD’S

• McDonald's has over 30000

restaurants in the world,

operating in over 100 countries.

• 80% of restaurants are

franchised

• McDonalds is often "considered

the gold standard of franchising".

MERIT

• Increase Revenue: McDonald’s earns a substantial up-front fee

and regular royalty payments from each franchise:

• Restaurants typically cost between £150,000 and £400,000 to buy.

Monthly rent on the premises based on sales and profitability

(usually between 10% and 18%).

Service fees for the use of McDonald’s system – 5%

Franchised sales was $67.65 billion compared with $18.29 billion

(operated restaurants)

=> McDonald’s keeps being a profitable business with positive cash flow, which can be used to support for its core activities, grow and expand larger in the future.

MERIT

• Leverage the brand: By acquiring new franchise outlets,

McDonalds was able to get in touch with a wider target market

and reach more consumers globally, this in the long-run helped it

achieve and maintain a high market share in the fast-food

industry and it also enhanced the company's corporate

DEMERIT

• Regulations and Legal Requirement: In order for McDonald’s to franchise the company must comply with substantial government regulations and legal restrictions.

• Extensive Preparations: McDonald’s should prepare to setup and train their franchisee.

• Prepare a thorough and detailed operation manual and provide technical, marketing, and other form of support throughout their franchise agreement. These are all time consuming.

CONTRACT MANUFACTURING

• One company arranges for another company in a different

country to manufacture its products.

• As known as ‘International subcontracting’ or ‘international

outsourcing’

• The company provides with the manufacturer with specifications,

(materials required if applicable)

• Many industries use this process, especially the aerospace,

defence, computer, energy, medical, food manufacturing,, …

• Some types include machining, complex assemble, gears,

grinding, …

CONTRACT MANUFACTURING (CONTD)

• Globalization of business technologies and increasing pressure on international firms to be globally competitive in costs, products offering, speed in bring new products

Driving force of contract manufacturing

• Economic development of a number of countries depend on contract manufacturing like China, Indonesia, Mexico, Taiwan, etc.

• It enables the firm to develop and control R&D, marketing, distribution, while handling over responsibility for the production to a local firm

IKEA

• Operating in 41 countries, IKEA is a global destination

store for home furnishing, appliances, ready-to-assemble

furniture, home accessories and kitchen products

• While most of the designs of IKEA products are made in

Sweden, manufacturing has been outsourced to China

and other Asian countries. IKEA outsources most of its

products.

MERIT

• Cost advantage :

Most of IKEA’ manufacturing partner are based in a country with low

cost labour (China, India… ). They specialize in specific types of

product

Having high volume production lines => lower unit cost

Do not need to invest expensive capital in equipment and hiring skilled

labour

Contribute to cost efficiency and cost leadership strategy of IKEA

Keep its products price 30-50% lower than competitors.

• Operational Advantage : IKEA maximise production through their

available capacity.

DEMERIT

• Control over manufacturing quality is difficult

Quality may be insistent

• Revealing the company’s secret: Contractor may become future competitor

Ex: Apple Inc. Most of their product are manufactured in China, but the key

software is still be controlled and monitored in its headquarter in CA.

TURNKEY PROJECT

• This is an entry mode whereby an international company is paid to design and construct a project for a client usually government in the developing country.

• The contractor which is the international company agreed to offer training on the usage of the project before handing over.

• Turnkey project normally happened in contraction firm, pharmaceutical, and electricity power station

• It is means of gaining great economic return from technology provided to the host country.

• Turnkey strategy is useful when the host government regulation limits foreign direct investment

• Turnkey product has less risk as compare to foreign direct investment especially with countries with political instability as a long-term investment in such country may expose the company to unacceptable political risk.

MANHATTAN CORPORATION – MERIT

• Turnkey projects have improved the financial capabilities of most companies that operateturnkey projects.

• Manhattan Corporation for instance which is engaged in turnkey mining and processingequipment have obtained substantial benefits from delivering projects in Africa in Australia

• In 2013 the company completed 80% 400 kW turnkey grinding mill for a chromeprocessing mine in Zimbabwe and received initial funding for the project.

• The Zimbabwean Project offers Manhattan Corporation the opportunity to undertakeinvestment in Zimbabwe, a country where there is a lot of restrictions on foreign directinvestment.

• In the same year Manhattan Corporation delivered a $22m a semi-autogenous grindingmill for Australian Copper company and this also boosted the company’s financialresources.

-

DEMRIT

• Risk of revealing company’s secrets to rivals It should

however be noted that if the international company

process technology which is it competitive advantage

then selling the technology after the project is done

means selling your competitive advantage.

• May create competitor

• Non-equity modes vary in terms of resource or commitment to

foreign markets.

• NEMs allow firm and reduce risk in high-risk countries, however,

they only have limited control over it.

• No market entry mode is appropriate in all circumstances.

• Most firms will have a vast portfolio on entry modes, depending on

each specific market situation.