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Entering International Markets Through Exports and Licensing Agreements Session 3 Benefits of Exporting Exports increase sales and income. Exports diversify market risk; offset lags in domestic demand 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 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 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 Where are comparable products mostly exported? Which countries are mostly importing comparable products? Look for high market share countries with limited competition from local producers. Where are comparable products most welcome and easiest to sell? 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? 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? Look for countries recommended as "Best-Prospect" markets for comparable products. Market Potential Matrix Country / Criteria 1 2 3 4 5 6 7 8 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 Indirect exporting 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 Advantages: 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 Higher startup costs Greater information requirements Higher risks Determining the Direct Export Channel (1) Performance specifications (2) Channel type 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 Criteria to guide selection on individual channel members Determining Performance Specifications 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) Branch/subsidiary vs. Agency/Distributor Control – principal appeal in favour of branch/subsidiary. 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, 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 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 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 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 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 • • • • • • Lower prices Greater convenience Customized offers Wider choice Trustworthiness Exclusive offers Advantages of entering foreign market through Direct Marketing Direct contact with the target group Effective progress monitoring 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 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 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 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 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) Circumvention of import barriers that increase the cost (tarrifs) or limit the quantity (quotas) of exports to the target market. 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) Lower political risks 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 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 Opportunity costs (the cost of not being able to enter the market in another way) Profitability Analysis of a Licensing Venture In order to avoid 2 errors: 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 (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 Basis for the projection of royalty revenues calculated as a percentage of sales at an expected royalty rate Incremental Revenues 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 Opportunity Costs Loss of current export or other net revenues Loss of prospective revenues Startup costs 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 Ongoing costs 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) (1) Technology Package 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 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) (3) Compensation 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 (4) Other Provisions 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 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: 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? 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 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 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 Particulary exposed to political risks Management contracts 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