Modes of Foreign Operations

Transcription

1 Modes of Foreign Operations Week 8 Choosing an entry mode: Exporting, Franchising and Licensing

2 Objectives By the end of this session students should be able to: Identify the modes of operations available to the internationalising firm Discuss the benefits and challenges of exporting, licensing and franchising. Recognise the process necessary to undertake in choosing a mode of operation

3 Foreign market entry decision-making process 1 COUNTRY OPPORTUNITIES Analysis (Assessing Country Attractiveness) 2 COUNTRY RISK ANALYSIS 3 COMPETITIVE ANALYSIS External Internal 4 ENTRY MODE Implementation 5 DEVELOPMENT PATHS 3 6 ORGANISATION: CONTROL

4 Transferability of competitive advantages What is the value of our existing advantages on local markets? To what extend do we need to adapt our products and management approaches? What new capabilities need to be acquired and how? 4

5 The transfer, adapt, create model What capabilities are needed to compete? What capabilities do we bring and can transfer? What capabilities do we bring but need to adapt? R & D Procurement Manufacturing Marketing General Management What capabilities we don t bring and need to create? 5

6 Competitive advantages in a foreign environment Product Service Design Innovation Sourcing Production Marketing General management Resources Assets Availability of scientists IT infrastructure Support & maintenance of equipments Availability of suppliers Skill base of the workforce Sales force Information Production managers Infrastructure:Transport/ telecom Logistics Transfer of production technology Distribution network Branding: global/local Local financing Local Skills Competences Ability to Adapt Appropriate Technology Negotiation skills Quality management Quality management Process control Relationship management What do we bring? What do we need to develop further? How? 6 Working capital management Partnership management

7 The market and/or resources opportunities that this country can offer Business development in a country is function of Strategic ambition The resources and capabilities of the company to compete profitably in that country The risk of doing business in that country The regulatory, and competitive context Entry strategy Why? When? How? 7

8 Entry strategy objectives Why? Expectations Key Performance Indicators Timing Type of Countries Mode of entry Market Resources Learning Co-ordination Access to natural Set up a base for resources global or regional Access to skilled development low cost labour Establish logistic Access to centres suppliers Close to financing institutions Market penetration and development. Capture a share of market Growth Market share Gross Margin Window of opportunity First mover vs. follower All types prioritised as a function of market potential, quality and competitive context Depending upon risks, opportunities, timing and skills. All mode of entry may apply Costs Quality Supply access First mover in order to pre-empt resources Resources rich countries Wholly owned (if allowed and if low risks) Joint ventures (If requested) Long term sourcing contracts Understand start of the art technology Be close to best practices Learn to compete in difficult and sophisticated markets Know How Process Improvement As soon as the country is recognised as a competence centre Countries with a strong technological and know how infrastructure Joint venture R and D centre Observatory Speed Control Synergies Three stages: Initiation Growth Coordination Hubs Representative office Global HQ Regional HQ Logistic centre Training centre Financial HQ 8

9 Premature phase Four phases When? Investment level and existing demand don t match Window phase The market takes off, but competitive landscape is uncertain First mover or follower? Competitive growth phase Window of opportunity may have passed Mature phase Innovation offers the only way in 9

10 First mover advantage When? Acquirers advantages Window of opportunity First movers advantages Pre-empt key resources Establish standards Blocks brands and distribution Learn Followers advantages Benefit from mistakes of first movers Capitalise on blind spots Ride on efforts of first movers 10

11 Entry modes How? High Intensity of investment Low Joint-venture with minority, equal or non absolute position Consortium partner Arm s Length Agreements Distributor Licensing Agent Representative Franchisee Correspondent Wholly-Owned subsidiary by greenfield investment Full or dominant acquisition Joint-Venture with Absolute majority (Above 66 %) Regional Headquarters Marketing Subsidiary Procurement Office Representative Office Technical Observatory None or limited control Ownership 11 Full or absolute control

12 Factors influencing entry modes Market Attractiveness Strategic Objectives Government Policies Country Risks Internal Capabilities Entry Modes Timing Wholly Owned Subsidiary Acquisition Joint-Venture License Franchise Agent Distributor Office 12

13 Entry modes - appraisal Subsidiary Acquisition Joint Venture License Market Attractiveness Relevant for Attractive Markets Relevant for both Attractive Markets and less Attractive Markets Costs High investments High Medium Low Time Horizon Long pay-off Medium-term if properly managed Medium-term Short-term Risks High exposure High Shared risks but risks of conflicts Low risks Internal Requirements Local know-how Acquisition skills Local insights Partnership management Technology transfer Competitive Advantages Can be high for early entrants Can be high if properly managed 13 Leveraged with partner Limited but testing base

14 Staged development PIONEERING ESTABLISHING DEVELOPING COUPLING Create a small team with mandate to gather information, establish contacts, initiate first move Invest Create JV Logistical base Develop people Expand networks Broaden scope Internal networking Interdependances ORGANISATIONAL CAPABILITIES - Intelligence - Learning - Partnering - Transferring - Learning - Partnering - Transferring INDIVIDUAL SKILLS - Cultural - Relational - Political - Relational - Technical 14 - Technical - Relational - Technical - Relational

15 Comparing entry modes Upfront Investment Financial & Managerial Wholly Owned Acquisition Joint Venture Licensing Repres. Office Agent Distributor HIGH HIGH MEDIUM LOW LOW/MED LOW Speed of Entry SLOW QUICK QUICK MEDIUM LOW Possibly Quick Market Penetration MEDIUM HIGH MED/HIGH MED/LOW LOW MED/LOW Control of Market (Customer Knowledge) Political Risk Exposure HIGH HIGH MEDIUM NIL LOW LOW/NIL HIGH HIGH MEDIUM LOW LOW LOW Technological Leakage Managerial Complexity LOW LOW HIGH/MED HIGH LOW LOW HIGH HIGH HIGH LOW MEDIUM LOW Potential Financial Return High Risk High/Medium Return High pay out High Risk High/Medium Return High pay out Medium/High Risk High/Medium Return Medium pay out 15 Low Risk High Return Low pay out Low Risk Return? Low Risk Return?

16 Choice of entry mode HIGH WHOLLY OWNED ACQUISITION JOINT VENTURE OPPORTUNITIES WHOLLY OWNED ACQUISITION MARKETING SUBSIDIARY JOINT VENTURE LICENSE LICENCE REP. OFFICE DISTRIBUTOR AGENT LOW REP. OFFICE DISTRIBUTOR AGENT AGENT LOW RISKS HIGH HIGH LOW PRESSURE FOR LOCALISATION 16

17 Entry modes Wholly owned subsidiaries: Requires financial and human capabilities Time Requires deep knowledge of local authorities Acquisition: Somewhat regulated and demanding 17

18 Entry modes Joint venturing: Often the only option Choice of partners Issues of fit Sometimes transformed into quasi acquisitions Demanding managerially 18

19 Choosing a mode of entry Dunning s eclectic theory (1988) is useful in deciding the best choice of entry into chosen markets. Ownership Advantages These are the tangible or intangible resources owned by the firm that gives it a competitive advantage over rivals. Hi tech may want high control so export Brand name want to promote so may use franchising or licensing

20 Choosing a mode of entry Location Advantages Factors that affect the desirability of the host country production relative to home country production. Desirability factors include wages, land costs, access to R&D, logistics, admin costs, customer needs, political stability etc If politically unstable in host country you are likely to export Licensing limits in countries discourages licensing Low cost labour might encourage direct investment

21 Choosing a mode of entry Internalisation advantages Factors that affect the desirability of a firm producing goods/ services themselves rather than contracting to other host country firm(s). Transaction costs critical to this decision (negotiating, monitoring, enforcing) If low subcontract, if high you might manufacture yourself. Industry differences exist some prefer to license and have set up systems to do so.

22 EXPORTING Selling goods or services to a foreign country. Direct Exporting occurs where an exporter sells to the end user either through: A sales representative Exclusive or non-exclusive in foreign markets A distributor A foreign market merchant who purchases the products from the manufacturer and sells them for a profit Subsidiaries or home office May have an overseas subsidiary that deals direct with remanufacturers, wholesalers or retailers or direct to end users Electronically Use of the internet and e-commerce Benefits provides greater control over marketing & distribution of products less intermediaries = earn higher profits

23 Exporting Indirect Exporting The exporter sells goods directly to or through an independent domestic intermediary in the exporters home country that exports the products to foreign markets via Export Management Companies Typically knowledgeable about legal, financial, and logistical details of importing and exporting. Transact business in the name of the manufacturer. Acts as an export arm of a manufacturer Operate on a contractual basis usually as an agent of the exporters Does such things as export docs, arrange transport, foreign payments, advertising etc Mostly work on a buy and sell arrangement, ie. buy from manufacturer - resell product - and invoice the customer directly.

24 Intermediaries Export Trading Companies Independent distributors that match buyers and sellers and may control supply to foreign customers eg Sogo Shoshas in Japan control major mineral deposits in foreign countries whilst Korean Chaebol mainly into Korean exports Foreign Freight Forwarders Known as the travel agents of cargo An export or import specialist dealing in the movement of goods from producer to consumer Generally the largest export intermediary in terms of value and weight handled.

25 Advantages of Exporting avoids cost of establishing manufacturing operations in the host country helps the business achieve international experience Experience Curve : the systematic reduction in costs over time relative to the increase in knowledge.

26 Advantages of Exporting can enter markets more rapidly greater control over sale of product and associated marketing and distribution less risky than Foreign Direct Investment (FDI) sales growth / increased market opportunity to dispose of excess capacity opportunity to diversify sales

27 Disadvantages of Exporting costs associated with finding foreign distributors and satisfying international customers may be lower cost locations for manufacturing the product abroad barriers to trade can make it uneconomical or difficult to sell abroad high transport costs may reduce profitability of sales distributors / agents may sell a competitor s product, so there may be a question of loyalty

28 Factors to consider when selecting a Distributor: The size and capabilities of its sales force Its sales record An analysis of its territory Its current product mix Its facilities & equipment Its marketing policies Its customer profile Its principles, & the importance of your product to its business Its promotional strategies (Daniels, Radebaugh,and Sullivan, 2012)

29 FRANCHISING Franchising is a business relationship in which the franchisor (the owner of the business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor's goods or service, and to use the business name for a fixed period of time. Source: FCA: Jan 2014

30 Franchising: Definition The International Franchise Association defines franchising as a "continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organising training, merchandising and management in return for a consideration from the franchisee". Source: FCA Jan 2014

31 Franchising: how it works! Franchisor Provides: know how equipment materials brand names (usually a standard package) for a lump sum and continuing royalty Franchisee % of sales or surcharge on flat fee basic supplies plus other markups and contributions

32 Franchising Essentials Sound Concept recognisable individuality name appearance logo layout (even colour) product or service practical (prototype operation) consistency/standardisation; need to consider labour, availability of key supplies and foreign differences. i.e. taste.

33 Franchising Essentials staying power enduring need eg. food, clothing, mufflers, etc Not a fad/fashion, ie. can it be updated? Easy to replicate Adequate Financing especially foreign demands for adaptation advertising/promotion Careful selection/good relationship with franchisees Meets regulation requirements

34 Fee Structures Initial franchise fee which includes set up costs. Percentage based on turnover: fees based on a % of sales demands better operating systems & support because the fee regressively eats into operating profits. Flat Fee Structure: regular set payments eg: Cash Converters. Scaled System of Fees: as turnover increases the % fee is reduced.

35 Types of Franchises Business Format Franchise characterised by an on-going business relationship between the franchisor and franchisee. includes the product service & trademark, marketing strategy & plan, operating manuals & standards as well as quality control. E.g.: Wendy s Supa Sundaes

36 Types of Franchises Product & Tradename Franchising an independent sales relationship between supplier and dealer in which the dealer acquires some of the identity of the supplier. franchised dealers concentrate on one company s product line and to some extent identify their business with that company. not very popular (less than 10% of Australian Franchises)

37 For High profile international image Domestic operation saturated Foreign Franchisee interest Franchisee s financial input Franchisee motivation Franchisee s local knowledge Rapid market penetration; profit potential Distribution network The Franchisor Balance Against Control Franchisee dis-affection over time Cultural difference Site availability Intellectual property demands Legal requirements Need to build franchisor s image in foreign market/s Training demands

38 The Franchisee Balance For Well known brand Training Independent, yet size linked Low failure rate Continuing technology transfer Might have initial financing support International network Against Inappropriate or unfamiliar brand name Exaggeration of franchise benefits Undelivered promises Lack of security Negotiating disadvantages (when coming in) Proliferation of outlets

39 International Franchising taking an established business system to an international market. is increasing in popularity because promotes small business development, assists with local employment in the host country and enables economic growth. is appealing to former controlled or centrally planned economies as these countries often lack expertise in developing and managing businesses.

40 Difficulties of International Franchising Overly standardised products or services do not satisfy the needs of the foreign market. Insufficient domestic penetration, management depth and capital base. Poor selection of Franchisee. Inappropriate location selection. Limited understanding of foreign laws. Limited ability to maintain quality and to ensure correct royalties are paid. Inability to adapt to local culture.

41 Franchisee Internationalisation Jardine Matheson (HK) PIZZA HUT 7 ELEVEN franchises in convenience stores in Australia Hong Kong Guam Singapore Hawaii Vancouver Global spread of franchising Jollibee Hamburger Chain outsell McDonalds and Wendy s in Manilla Western methods, Asian taste In Singapore, Hong Kong, Brunei and middle east

42 International Franchising Structures According to Grant Thornton (Accounting and consulting firm) the four main types of structure are: Direct Franchise (small markets) Master Franchise (large markets) Joint venture Subsidiary company These structures may be used sequentially.

43 Master Franchising Engaging a foreign partner to introduce the organisation s rights into a large territory, in which they can introduce sub-franchising. The Master Franchise holder is granted the rights to the Franchise system and is then used as an intermediary to select and train franchisees, select franchise locations and act as the link between the foreign market and the Franchisor in the domestic market.

44 Timing: when to go international! Develop your franchise package at home experiment on components training and selection of franchisees Explore international possibilities market research prioritisation Remember: franchising is highly visible your success will rapidly attract others

45 Master Franchising Vs Joint Venture Master franchising Most popular commercial vehicle Advantages: Approached by potential franchisee Lower capital needs/lower risks Franchisee s local knowledge of market/culture Lump sum initial fee & ongoing royalties Disadvantages: Lack of control Non-adherence to the system Some terminations result

46 Master Franchising Vs Joint Venture Joint Ventures: Proactive franchisors moving away from Master Franchises/ Reactive franchisors considering JVs Advantages Greater control Larger pool of potential franchisees Preferred by some investors as evidence of franchisor s commitment Disadvantages Greater capital needs/ higher risk Greater commitment of management resources

47 LICENSING A contractual transaction in which the owner of certain knowledge assets - so called intellectual or industrial property sells to another organisation or individual the right to use these assets for a defined purpose. Compensation involved in the sale of the right to an asset is referred to as a royalty.

48 Licensing Property Licensed may include patents trademarks copyrights technology technical know-how specific business skills

49 Licensing Critical to the NEGOTIATION PROCESS is the ability to demonstrate value to the potential licensee. To achieve this requires you to undertake market research.

50 Main users of licensing The leading licensors ranked by licensing revenues are in the apparel, games, and toy industries. Top licensors: 1. Disney Consumer Products 2. Warner Bros 3. Nickelodeon 4. Marvel Entertainment 5. Major League Baseball 6. Sanrio (Japan) 7. The Cherokee Group 8. National Football League 9. General Motors 10. Lucasfilm Ltd (Source: Wilensky, Dawn, 2006)

51 Licensing is suitable for: smaller firms highly diversified firms resource stretched companies companies with mature product lines risk averse firms, e.g. countries with high economic and political instability countries demanding active local participation countries with high barriers to imports

52 Advantages of Licensing Less risk to environmental influences. Less need for capital, personnel. Avoid barriers to exporting. May create opportunities for long run penetration of foreign markets. Often leads to associated exports. May contribute to the effectiveness of other foreign operation methods.

53 Advantages of Licensing Can be used to service residual markets. Can lead to reciprocal arrangements such as cross-licensing and imports and cooperation in 3rd markets. Can assist in funds transfer and lower taxation.

54 Disadvantages of Licensing Loss of control over quality May create a competitor Secrecy Method of payment what currency? when and how royalty based so how to identify correct sales Short term instead of long term Limited involvement / commitment

55 Disadvantages of Licensing Some loss of control of the foreign market Some loss of control of technology Contractual framework limits flexibility rigid agreements

56 Key Issues of Licensing Scope of licensee s rights specifying the technology, intellectual property etc to be included in the agreement and how it will be transferred from licensor to licensee. Licensee fees The licensee typically pays the licensor a fixed amount upfront and an ongoing royalty of typically 2-5 percent on gross sales generated from using the licensed asset. Source: Cavusgil et al, 2008

57 Key Issues of Licensing Contract length The length of a contract is normally 5-7 years with an option for renewal. Source: Cavusgil et al, 2008 Research in the UK shows contracts generally between 3-15 years with average being 5.6 years.

58 Key Issues of Licensing Licensee selection not just selling technology, but choosing a partner for a mutually beneficial relationship time and care in selection pays legal document is no ultimate insurance require trust, mutual benefit, compatibility

59 Key Issues of Licensing Licensees to avoid: Licensees who are marketing a competitive product. (Personnel may not wish to see their technology replaced and may lock the new technology away) The established leader in the field (ego) Companies which have invested large sums of money attempting to achieve what the licensor has already achieved

60 Key Issues of Licensing Companies which have over-extended themselves on other projects and will not be able to push the licensor s product. Relatively large companies, as the licensed business will often seem so small in their overall activities that little marketing support is considered justified. Companies with a past history of uncompleted projects. Companies with production & marketing resources already stretched to the limit.

61 Key Issues of Licensing Agreements must contain: Dispute resolution Length of agreement Termination of agreement including sunset clause Licensee compliance terms Payment terms Control over technology (usually the rights to any changes to technology made by the licensee, remain the property of the licensor)

62 Licensing v Franchising Licensing is moving to a more packaged form (away from a basic production of goods/ service). Franchising has greater control of the marketing process; whereas with licensing, the licensee generally is responsible for this.