Download Entering International Markets Through Exports and

Entering International Markets
Through Exports and Licensing
Agreements
Session 3
Benefits of Exporting
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Exports increase sales and income.
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Exports diversify market risk; offset lags in domestic demand
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Exports can help offset sales slow-downs during recessions and seasonal
changes. When the domestic economy stagnates, the economy in other
countries may be growing
Exports extend product life cycles
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If you don’t export, you're competing only for a larger slice of the
domestic pie. With exporting, you expand the pie - the entire world is
your market
As technology advances and tastes change, many products become
obsolete or lose their appeal, particularly in highly industrialized markets
Exports use idle capacity – economies of scale
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Increased exports put idle production capacity to work, often with the
same equipment, staff and capital investment
Indicators of export potential and
success
Export readiness
indicators
Export demand
indicators
• Is top management
committed to exporting
as a new or expanded
area of activity?
• Are organizational and
marketing practices
suitable for exporting?
• Could company
promptly fill new export
orders from present
inventory or other
sources?
• Has company received
any unsolicited inquiries
from foreign firms?
• Are products like those
manufactured by the
company already being
exported?
Export
competitiveness
indicators
• Are domestic sales of
the product doing
reasonably well?
• Does the company have
a relatively strong share
of the domestic market?
• Is the product pricecompetitive in the
domestic market?
• Does the product
compare favorably with
domestic competitors in
features and benefits?
Estimating Industry Market Potentials
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Where are comparable products mostly exported?
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Which countries are mostly importing comparable products?
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Look for high market share countries with limited competition from local
producers.
Where are comparable products most welcome and easiest to sell?
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Look for countries with the largest and fastest growing imports of the product
over the past several years.
Where would comparable products be most competitive?
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Look for the largest and fastest growing export destinations for the product
over the past several years.
Look for countries with high receptivity to the product and no significant market
barriers.
Which markets do the experts consider most promising?
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Look for countries recommended as "Best-Prospect" markets for comparable
products.
Market Potential Matrix
Country /
Criteria
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2
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5
6
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9
County 1
County 2
County 3
County 4
County 5
County 6
Criteria:
1. Largest export markets, latest year
2. Fastest growing export markets, past 3 yrs
3. Fastest growing export markets, latest year
4. Largest importing countries, latest year
5. Fastest growing importing countries, past 3 yrs
6. Fastest growing importing countries, latest year
7. Strong share of import market, latest year
8. Limited competition from local producers
9. High receptivity to products from your country
10. No significant market barriers
10
Indirect and Direct Export Channels
Home country
Foreign country
International
Trading Company
Export Merchant
Resident Foreign
Buyer
Allied Manufacturer
Export Management
Company
Manufacturer
Wholesaler
Retailer
Industrial
Distributor
Industrial
User /
Government
Foreign Agent
/ Distributor
Foreign Branch
/ Subsidiary
Household
Consumer
Exporting as a learning experience
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Indirect exporting
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No incremental investment in fixed capital
Low start-up costs
Few risks
Profits on current sales
Exploratory, experimental behaviour to obtain knowledge about
foreign markets and ability to compete in them
Time
Adding products to the product line
Perceived foreign
risks as compared
to domestic
markets
Entering new target markets
Shifting to direct exporting
Knowledge of Foreign Country / Market
Direct exporting:
Advantages and Disadvantages
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Advantages:
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Partial or full control over foreign marketing plan (distribution, pricing,
promotion, product services, etc.)
Concentration of marketing effort on the manufacturer’s product line
More and quicker information feedback from the target market, which can
improve marketing effort (e.g. Product adaptation or more responsive pricing)
Better protection of trademarks, patents, goodwill, and other intangible
property
Disadvantages
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Higher startup costs
Greater information requirements
Higher risks
Determining the Direct Export Channel
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(1) Performance specifications
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(2) Channel type
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What the channel is intended to accomplish
Which channel (or channel mix) is optimum to by matching
performance specifications against alternative channel systems,
with due regard to paid costs
(3) Channel members
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Criteria to guide selection on individual channel members
Determining Performance Specifications
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What geographical market coverage do we want in a target
country?
How intensive should our market coverage be?
What specific selling and promotion efforts do we want from
channel agencies?
What physical supply services (e.g. volume and location of
inventories and delivery systems) do we want from channel
agencies?
What pre- and post-purchase services (credit, installation,
maintenance, and repair) do we want from channel agencies?
Intensity of market coverage and its
implications
Intensive (‘Blanket’) market
coverage)
• Many channel members, especially
at the final buyer-level
• Multiple channels with little or no
interest in protecting any one of
them
• Heavier reliance on advertising and
less direct promotional support of
channel members
• Limited channel control, because
intermediaries have no particular
allegiance to the manufacturer and
can easily resist its efforts to
influence their behaviour
Selective coverage
• At the extreme, selective policy
uses single agent or distributor
who is given exclusive selling rights
in a designated territory that may
embrace the entire target country
• More control over channel
performance
• Demand protection and active
support
Determining the Channel Type (1)
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Branch/subsidiary vs. Agency/Distributor
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Control – principal appeal in favour of branch/subsidiary.
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Possibility to control full marketing channel (producer-end buyer).
Company can develop a channel that more closely meet
performance specifications
Costs – principal appeal in favour of agency/distributor,
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In case of agent/distributor channel type costs are mostly variable
costs (commissions and mark-ups) tied to sales volume, whereas
substantial part of branch/subsidiary costs are fixed costs (office and
storage facilities, permanent working capital)
At which level of sales (if any) in the target market will branch/subsidiary until
sales costs fall below agent/distributor unit sales costs?
Determining the Channel Type (2)
Foreign agents
• Foreign agent – independent
middleman who represents the
manufacturer in a foreign country.
• The agent does not title to the
manufacturer's goods and, and he
seldom holds any inventory.
• Agent’s primary task is to make
sales to make sales to other
middlemen (wholesales, retailers,
etc.) or to final buyers.
• May also provide some technical
services.
• Compensation – commission based
on sales.
Foreign distributors
• Foreign distributor – an
independent merchant who takes
title to the manufacturer’s goods
for resale to other middlemen or
final buyers.
• Performs following functions:
socking inventories, promotion,
order processing, physical delivery,
product maintenance and repair.,
• Distributor’s compensation is his
profit margin
• Usually functional discounts
granted to distributors are
substantially above agent’s
commissions.
Choosing a Foreign Agent/Distributor
Drawing up the distributor profile
Locating distributor prospects
Evaluating distributor prospects
Choosing the distributor
The Distributor Profile
Lists all the attributes that a company would like to get in its
distributor for a foreign market
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Trading areas covered
Lines handled
Size of firm
Experience with manufacturer’s
or similar product line
Sales organization and quality of
sales force
Physical facilities
Willingness to carry inventories
After-sales servicing capability
Knowledge / use of promotion
Cost of operations
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Reputation with suppliers,
customers, banks
Record of sales performance
Financial strength
Overall experience
Relations with government
Knowledge of English or other
relevant languages
Knowledge of business
methods in manufacturer’s
country
Willingness to cooperate with
manufacturer
The Distributor Profile: Fundamental
qualities
Experience
Loyalty
A representative who
would not desert you
for a competitor or
represent a firm with
a competing product
A representative with a solid
track record as an agent or
distributor; expertise in the
product area; and strong
connections in the user
community
Honesty
A representative with
a good reputation in
the industry and good
bank and trade
references
Capability
A representative who can
market and support the
products in the way require (e.g.,
promote the product, train
users, install and service
equipment)
Motivation
A representative who
is enthusiastic about
the product and able
and willing to give it
priority
International Direct Marketing
International Direct Marketing:
Definition
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International direct marketing in the broadest sense
includes all market activities which use single-level (more
direct) communication and/or direct distribution or
dispatching for the purpose of individually addressing
particular target groups of foreign origin. International
direct marketing in the broadest sense also covers those
market-oriented activities which use multi-level
communication to create direct, individual contact with
target groups of foreign origin.
Driving forces behind expansion of
International Direct Marketing
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The development of direct marketing databases
The worldwide spread of reliable payment methods
(credit cards, electronic fund transfers)
The development of global shipping companies such as
DHL, FedEx and UPS
Development of regionally integrated economic areas
with similar urban lifestyles in America, Europe and Asia
In marketing, the trend towards cross-media and
interactive communication with individual customers
encourages direct marketing.
Objectives/Benefits of Direct Marketing
Company’s perspective
• Acquiring new customers
• Building customer loyalty
• Improving customer
service
• Reacquiring lost
customers
• Sales of products and
services
• Branding and brand
management
Customer’s perspective
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Lower prices
Greater convenience
Customized offers
Wider choice
Trustworthiness
Exclusive offers
Advantages of entering foreign market
through Direct Marketing
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Direct contact with the target group
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Effective progress monitoring
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Enables the company to use new information rapidly thus moderating associated
risks more effectively. Generally, risks can be limited effectively by controlling the
scope of market entry.
International direct marketing’s fast, simple implementation also makes it a
cheap form of internationalization
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Comparably fast feedback. Any problems in the marketing mix - i.e., from the
product to the price all the way to the promotional campaign - can be identified
and fixed at short notice.
Particularly attractive to small and medium-sized enterprises
In the long term, the potential acquisition of regular customers offers a
substantial source of growth and shareholder value for the company.
The Foreign Target Group
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Customer profiles from the domestic market are usually a starting
point for companies seeking to define a foreign target group.
The general direct marketing experience of consumers in a
particular market represents a good indicator of the prospects for
direct marketing campaigns in that market.
In many countries, there is only limited access to well-founded
descriptions of the target group.
The company’s own tests and market research are the best tools
for adapting a domestic customer profile to the target market.
72% of all companies that use international direct marketing
substantially adapt their proven domestic strategy, while only 6%
develop a completely new strategy and only 9% leave their strategy
unchanged (Topol and Sherman,1994)
Entering Foreign Markets through
Licensing and Other Contractual
Arrangements
International Licensing: Definition
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International licensing includes a variety of contractual
arrangements whereby domestic companies (licensors)
make available their intangible assets (patents, trade
secrets, know-how, trademarks, and company name) to
foreign companies (licensees) in return for royalties
and/or other forms of payment.
Commonly, the transfer of these intangible assets or
property rights is accompanied by technical services to
ensure the proper use of the assets.
Reasons for licensing abroad
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To penetrate foreign market
To get incremental income on technology that has already
been written off against domestic sales
To acquire the research output of a foreign firm in return for
that of a domestic company (“cross-licensing”)
To protect patents and trademarks in a foreign country against
loss for nonuse or against possible infringement
To establish legal ownership of company’s patents and
trademarks in order to facilitate the repatriation of income
when exchange contracts restrict divident payments, or to
meet home of foreign government requirements (implemented
via formal licensing agreements with their own controlled
foreign subsidiaries)
Advantages of Licensing vs (1)
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Circumvention of import barriers that increase the cost
(tarrifs) or limit the quantity (quotas) of exports to the target
market.
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When exports are no longer possible to a target market with the
sudden imposition of of tarrifs or quotas or when exports were no
longer profitable with the appearence of more intense competition
Prolonged depriaciation of target country’s currency
Overcomes problem of high transportation costs, which make
the export of some products noncompetitive in target
markets
If manufacture’s product requires substantial physical
adaptation to meet the needs of target market, licensing may
be advantageous because it can transfer most of the
adaptation cost to the foreign licensee
Advantages of Licensing (2)
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Lower political risks
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Some governments prefer licensing over foreign investment as a way to get
technology
Licensing is immune to expropriation because licensor does now own physical
assets in a target country
In some situations, a manufacturer may be kept out of a target country by
both import and investment restrictions, and licensing becomes the only
viable entry mode
For companies whose end product is a service, licensing or franchising may
be a more attractive way to provide the service than through branch or
subsidiary
As a low-commitment (managerial, technical and financial) entry mode may
be especially attractive to small manufacturers
Agvanatgeous in case of low or uncertain sales potential in a target market
Disadvantages of Licensing
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For companies that do not posses technology, trademarks or
a company name that is attractive to potencial foreign users
licensing is simply not a foreign market entry alternative
Lack of control over the marketing plan and program in the
target country
The absolute size of income from licensing arrangement as
compated to that from exporting to, or investing in, the target
country (however, profitability can be very high)
The risk of creating a competitor in third markets or even in
the manufacturer’s home market
Exclusiveness
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Opportunity costs (the cost of not being able to enter the market in
another way)
Profitability Analysis of a Licensing
Venture
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In order to avoid 2 errors:
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Underlicensing (not licensing when one should)
Overlicensing (licensing when one should not)
versus
Expected
profitability of
a licensing
venture
Expected
profitability of
alternative
entry modes
Projecting Profit Contribution
Profit contribution of the venture =
Incremental Revenues – Incremental Costs
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(1) Research the foreign market to ascertain the market
potential for this kind of product
(2) Estimate sales potential (market share potential) of the
prospective licensee by evaluating his capacity to manufacture
the licensed product at a competitive cost and quality and to
sell it in the target market
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Basis for the projection of royalty revenues calculated as a percentage
of sales at an expected royalty rate
Incremental Revenues
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Lump-sum royalties (including disclosure fees)
Technical assistance fees
Engineering or construction fees
Equity shares in license firm
Dividends on equity shares
Profits from sales to licensee (machinery, equipment, raw materials,
components, or nonlicensed products)
Profits from purchase and resale of goods manufactured by licensee
Comissions on purchases or sales made for licensee
Rental payments on licensor-owned mechinery or equipment
Management fees
Patents, trademarks, and know-how received from licensee (grant-backs)
Incremental Costs
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Opportunity Costs
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Loss of current export or other net revenues
Loss of prospective revenues
Startup costs
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Investigation of target market
Selection of prospective licensee
Acquisition of local patent/trademark
protection
Negotiation of licensing agreement
Preparation and transfer of documentation
Adaptation of technolog y for licensee
Training licensee’s employees
Engineering, construction and plant
installation services
Contribution of machinery, equipment, and
inventory to licensee
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Ongoing costs
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Periodic training and updating of
licensee
Maintaining local patent/trademark
protection
Quality supervision and tests
Auditing and inspection
Marketing, purchasing, and other
nontechnical services
Management assistance
Resolution of disputes
Maintenance of licensor staff
Selecting a Prospective Licensee
Determining the licensee profile
Sourcing licensee prospects
Evaluating and comparing licensee prospects
Selecting the most appropriate licensee
candidate
Elements of the Licensing Contract (1)
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(1) Technology Package
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Definition /description of the
licensed industrial property
(patents, trademarks, knowhow)
Know-how to be supplied
and and its method of
transfer
Supply of raw materials,
equipment, and intermediate
goods
(2) Use conditions
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Field of use of licensed technology
Territorial rights for manufacture and sale
Sublicensing rights
Safeguarding trade secrets
Responsibility for defence action on patents and
trademarks
Exclusion of competitive products
Exclusion of competitive technology
Maintenance of product standards
Performace requirements
Rights of licensee to new products and
technology
Reporting requirements
Auditing / inspection rights of licensor
Reporting requirements of licensee
Elements of the Licensing Contract (2)
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(3) Compensation
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Currency of payment
Responsibilities for payment of local
taxes
Disclosure fee
Running royalties
Minimum royalties
Lump-sum royalties
Technical assistance fees
Sales to and/or purchases from
licensee
Fees for additional new products
Grantback of product
improvements by licensee
Other compensation
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(4) Other Provisions
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Contract law to be followed
Duration and renewal of contract
Cancellation/termination provisions
Procedures for the settlement of
disputes
Responsibility for government
approval of the license agreement
International Franchising
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Franchising is a form of licensing in which a company
(franchisor) licenses a business system as well as other
property rights to an independent company or person
(franchisee).
The franchisee does busines under the franchisor’s trade name
and follows the policies and procedures laid down by the
franchisor.
In return franchisor receives fees, running royalties and other
compensation form franchisee
Most common busines fields:
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Fast-food restaurants, car rentals, construction, soft drinks, hotels and
motels, real estate brokerage,.
Advantages and Disadvantages of
Franchising
Advantages
• Rapid expansion into a
foreign market with low
capital outlays
• A standardized method
of marketing with
distinctive image
• Highly motivated
franchisees
• Low political risks
Disadvantages
• Limitations on the
franchisor’s profits
• Lack of full control over
franchisees operations
• Possible creation of
competitors
• Restrictions imposed by
governments on the
terms of franchise
agreements
When Franchise is an attractive mode of
entry?
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When company has a product that cannot be exported to a
foreign target country
When company does not want to invest in a country as a
producer
When company’s business process can be easily transferred to
an independet party in a target country
Not a good candidate for franchise:
 Physical products whose manufacture requires substantial
capital investment and/or high levels of managerial or
technical competence
 Service products that involve sophisticated skills (advertising,
accounting, banking, insurance, management consulting)
Contract Manufacturing
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In contract manufacturing an international firm sources a product from an
independent manufacturer in a foreign country, and subsequently markets
that product in the target country or elsewhere
Advantages
Disadvantages
• Requires only a comparatively small
commitment of financial and managerial
resources
• Allows for aquick entry into the target
country
• Avoids local ownership problems
• Permits the international company to
excercise control over marketing and
after-sales services
• Esecially attractive when target market
is too small to justify investment entry
and export is blocked by restrictions or
is simply too costly
• May be difficult or impossible to find a
suitable local manufacturer
• Substantial technical assistance may be
required to bring local manufacturer to
the desired quality and volume levels
and to keep him in those levels
• International company runs a risk of
creating a future competitor
Turnkey Construction Contracts
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A turnkey contract carries the standard construction
contract a step further by oblicating the contractor to
bring a foreign contract up to the point of operation
before it is turned over to the owner
Many turnkey contracts are with host governments
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Particulary exposed to political risks
Management contracts
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An international management contract gives a company the right to
manage the day-to-day operations of an enterprise in a foreign target
country.
Management control is limited to ongoing operations
Management contracts are used mainly to supplement an actual or
intended joint venture agreement or a turnkey project.
In this way, an international company can obtain management control
over a nonequity foreign venture
Low risk market entry but income is limited to fees for a fixed duration
of time
From an entry strategy perspective, management contracts are
unsatisfactory because they do not allow a compnay to build a
permanent market position for its products