Modes of Entering in International Business
Modes of Entering in International Business
Modes of Entering in International Business
Licensing
Licensing: In licensing, the licensor(the firm which owns the rights) draws a
contractual arrangement with a licensee (the firm which wants to use the
rights) providing the right to use its intellectual property such as its brand
name, technology, work methods, company name, trademarks, patents and
copyrights for a particular business..
Strategic Alliances
International firms can cooperate in various forms such as sharing production
facilities, licensing proprietary technology, co-funding research projects and
using existing distribution networks to promote each other’s products. These
methods of cooperation are known as strategic alliances. It is a business
arrangement in which two or more business entities mutually cooperate for
their benefit.
Thus a strategic alliance is formed for the mutual benefits of a long-term
formal relationship between two or more business parties. It helps to pursue
a set of agreed goals or meet a critical business need while both
organisations remain independent. Here, two or more companies comply to
cooperate to conduct a business activity and each company brings in different
strengths and abilities to the arrangement
Franchising
In franchising, a contractual agreement is set up in which an organisation
(franchiser) trades the right to use its intellectual property (patents, brand
names, copyrights, company name, technology, work methods and
trademarks) to another organisation (the franchisee) for a particular fee. The
franchiser assists and/or exercises a significant amount of control over the
way the franchisee functions.
Types of franchise agreements:
• Product/trade name franchises – the product is distributed in a particular
territory or place using the manufacturer’s trademark.
• Car dealerships, petrol service stations, soft-drink bottles.
• Business format franchises – the licensing of a trademark for business is
incorporated in a particular territory along with an entire system to conduct
a business. Almost 75% of all franchise businesses are of this model.
Some examples are McDonalds, KFC, Body shop, Giordano concept
shops, etc.
Franchising strategies for rapid growth in international markets:
• Single-unit franchising – the right to operate a single unit within a defined
territory is granted to an individual franchisee by the franchiser.
• Multi-unit franchising – the franchiser grants the franchisee the right to
operate more than one franchise
• Conversion franchising – an existing business is acquired and converted
into a franchise
• International franchising – it mostly involves “Master Franchising” and
joint-ventures
• Creative franchising – it includes various things like money-back
guarantees, stock ownership and to the use of sophisticated management
techniques.
Key considerations in franchising
• There must be a sound and cohesive franchising package which adapts
to environment of target country
• The franchiser should be continually able to provide value to franchisees
• There should be sufficient financing
• Franchisees should be carefully selected
• Strong cordial relationships should be built with franchisees •
Continuous support should be provided to franchisees
• It should comply with foreign regulations.
Financial contribution, knowledge of the local scenario, motivation of the
franchisee and lesser risks are the advantages to the franchiser. The
disadvantages include lack of ultimate control, higher demands of training,
protecting the intellectual property, creating potential competitors, misusing
the rights of the franchise and less profitability.
Contract Manufacture
A firm which markets and sells products to international markets might
arrange for a local manufacturer under contract to produce the product for
them.
Examples include firms like Nike and Gap, both of whom use contract clothing
and shoe manufacturing in lower labour cost countries. The advantage of
arranging contract manufacturing is that it allows the firm to concentrate on
its sales and marketing activities.As investment is kept to minimum, it makes
withdrawal easy and less costly if the product proves to be unsuccessful.
Contract manufacture might be necessary to overcome trade barriers and
sometimes it is the only way to gain entry in to a country in which the
government attempts to secure local employment by insisting on local
production.
If political instability makes foreign investment unwise, this may be the best
way of achieving a marketing presence, without having the risk of large
investment in manufacturing.The disadvantage of contract manufacture as an
entry method is that it does not allow buyer control over the manufacturer’s
activities.
In the brewing industry there are a variety of arrangements where brewers
contract the manufacture of beer brands, but other market entry methods are
used by the beer brand owners to increase market share.
Consignment Sales
When the exporter is initially getting a feel of the markets and is trying to tap
the customers, he would need to hold the stocks at hand so that he is able to
offer immediate delivery to the new customers and help bag orders.
In such cases the exporter will use a consignment agent who will import and
hold the consignment on behalf of the exporter. Once the orders are received
and the consignment is delivered, the consignment agent will receive
payment from the customer and in turn repatriate the amount received back
to the exporter after keeping the agreed amount of margin as per his
agreement. In such cases the stocks are owned by the exporter until it is
invoiced by the consignment agent to the customer. The consignment agent
only acts as a custodian of goods and does not carry any other ownership.
He provides a legal entity for the exporter to send goods to the foreign country
and manages the supply chain services as per instructions of the exporter.
The entire responsibility, risk including marketing, pricing, collections and
liquidation of stocks lies with the exporter.
Summary
Business enterprises always intend to expand tentacles beyond their
traditional geographical limits and a few contemplate moving beyond the
boundaries of the nation. While planning strategies for going international it
is necessary for business enterprises to understand the attendant risk and
opportunities for marketing of products in global markets. All aspects of
business pertinent to a particular market in the globe have to be critically
analysed. Accordingly, approach of international market entry should be
devised and employed to achieve a desired success in business. In a foreign
direct investment, it is necessary to take a decision on whether the approach
should be brown field strategy or green field strategy.
In the case of exports, beginners may resort to indirect exports through
recognised export houses or star trading houses, so that risk of dealing with
a non-face to face buyer abroad is reduced. Once enough experience is
gained and client base is established direct export may be contemplated.
While most of the countries promote exports, in the liberalised regime there
is enough scope for import business. Hence international market entry may
be made through import trade. The other modes of market entry are through
licensing, forming joint ventures, mergers, acquisitions, strategic alliances,
turnkey operations, franchising, contract manufacture, and strategic
marketing and consignment sales. While associating with any foreigner or a
company incorporate abroad, it is essential to analyse the counter party’s risk.
These counter party risks vary from customer to customer or from country to
country.
Entry into international markets for promoting sale of products is essential for
any expanding business firm. In the era of liberalisation, circumstances are
conducive for international marketers to widen the customer base and
increase sale. There is scope for developing global brands of products by
various strategies of market entry and exploitation of facilities provided by
nation states around the globe.