Strategies of Globalization.
List of various Strategies of Globalization for Foreign Market Entry:
- Licensing and Franchising.
- Contract Manufacturing.
- Management Contracting.
- Turnkey Contracts.
- Wholly Owned Manufacturing Facilities Companies.
- Assembly Operations.
- Joint Ventures.
- Third Country Location.
- Mergers and Acquisition.
- Strategic Alliance
- Counter Trade.
Exporting is the most traditional strategy of entering the foreign market. Exporting is the appropriate strategy in following conditions:
- The volume of foreign business is not large enough to justify production in the foreign market.
- Cost of production in the foreign market is high.
- Foreign market is characterized by production bottlenecks like infrastructural problems, problems of raw materials.
- There are political or other risks of investment in the foreign country.
- The company has no permanent interest in the foreign market or there is no guarantee of the market available for a long period.
- Foreign investment is not favored by the foreign country.
- Licensing or contract manufacturing is not a better alternative.
Exporting is considered to be a good strategy in initial stages. But exporting is not a good strategy in the long run.
Licensing and Franchising.
Under international licensing, a firm in one country (licensor) permits a firm in another country (licensee) to use its intellectual property (such as patents, trade marks, copy rights etc.). Licensee pays royalty or fees to the licensor. Franchising is a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner.
International licensing/ franchising have grown substantially. It requires neither capital investment, nor knowledge and marketing strength in the foreign markets. One of the important risks of licensing is that the licensor would be developing a potential competitor the licensee would become a competitor after the expiry of the licensing agreement.
Under contract manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product. Contract manufacturing has a number of advantages the company does not need resources for setting up production facilities. It is less risky way to start with. If the business does not pick up sufficiently, it may be dropped easily. However, contract manufacturing has the risk of developing potential competitors.
In a management contract the supplier brings together a package of skills that will provide an integrated. service to the client without incurring the risk and benefits of ownership. According to Philip Kotler, “Management contracting is a low-risk method of getting into a foreign market and it starts.yielding income right from the beginning.
The arrangement is especially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period. Some Indian companies Tata Tea, Harrisons Malayalam and AVT—have contracts to manage a number of plantations in Sri Lanka. One limitation of management contract is that it may prevent a company from setting up its own operations for a particular period.
Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries steel mills, cement and fertilizer plants etc. construction projects and franchising agreements.
A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller. The term is sometimes used in fast food franchising when a franchiser agrees to select a store site, build the store, equip it, train the franchisee and employees and sometimes arrange for the financing. Many turnkey contracts involve government/ public sector as buyer (or seller in some cases). A turnkey contractor may subcontract different phases/ parts of the project.
Wholly Owned Manufacturing Facilities Companies.
Companies with long-term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. As Drucker points out, It is simply not possible to maintain substantial market standing Man important area unless one has a physical presence as a producer. A number of factors like trade barriers, differences in the production and other costs, government policies etc., encourage the establishment of production facilities in the foreign markets.
Establishment of manufacturing facilities abroad has several advantages. It provides the firm with complete control over production and quality. It does not have the risk of developing potential competitors as in the case of licensing and contract manufacturing. Wholly owned manufacturing facility has several disadvantages too. In some cases, the cost of production is high in the foreign market.
There may also be problems such as restrictions regarding the types of technology, non-availability of skilled labor production bottlenecks due to infrastructural problems etc. If the market size is small, a separate production unit for the market may be uneconomical. Foreign investment also entails political risks.
A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish. Overseas assembly facilities in selected markets. In a sense, the establishment of an assembly operation represents a cross between exporting and overseas manufacturing.
Having assembly facilities in foreign markets is very ideal when there are economies of scale in the manufacture of parts and components and when assembly operations are labor-intensive and labor is cheap in the foreign country. It may be noted that a number of U.S. manufactures ship the parts and components to the developing countries, get the product assembled there and bring it back home. The U.S. tariff law also encourages this. Thus, even product meant to be marketed domestically are assembled abroad.
Joint venture is a very common strategy of entering the foreign market. Under joint venture, ownership and management are shared between a foreign firm and a local firm. In countries, where fully foreign owned firms are not allowed or favored, joint venture. is the alternative. Joint venture permits a firm with limited resources to enter more foreign markets.
Further, the local partner would be in a better position to deal with the government and public. A right local partner for a joint venture can have a major impact on a firm’s competitiveness, because such a partner can serve as a cultural, bridge between the manufacturer and the market.
For example, several successful foreign affiliated companies have demonstrated how the right partnership can strongly enhance a firm’s competitive edge and its ability to adopt to and cope with the idiosyncrasies of the Japanese market. A joint venture can succeed only if both the partners have something definite to offer to the advantage of the other, the reap definite advantages, and have mutual trust and respect.
Third Country Location.
Third country location is sometimes used as an entry Strategy, when there are no commercial transactions between two nations because of political reasons on when direct transactions between: two nations are difficult due to political reasons or the like, a firm is one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People’s Republic of China through bases in Hong Kong.
Third country location may also be helpful to take advantage to the friendly trade relations between the third country and the foreign market concerned. Thus, for example, Rank, Xerox found it convenient to enter the erstwhile USSR through its Indian joint venture Modi Xerox.
Further, third country location may be resorted to reduce cost of production and thereby to increase price competitiveness to facilitate market entry or for improving/ maintaining the market position: The incentives offered by governments, particularly of the developing countries, for investment and exports encourage such third country location. The export processing zones are particularly attractive in this respect.
Mergers and Acquisition.
Mergers and acquisitions have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy. Mergers and acquisitions have certain specific advantages.
It provides instant access to markets and distribution network. As one of the most difficult areas in international marketing is the distribution, this is often a very important consideration for mergers and acquisitions. Another important objective of mergers and acquisitions is to obtain access to new technology or a patent right. Mergers and acquisitions also has the advantage or reducing the competition.
Mergers and acquisitions may also give rise to some problems which arise mostly because of the deficiencies of the evaluation of the case for acquisitions. Sometimes the cost of acquisition may be unrealistically high. Further, when an enterprise is taken over, all its problems are also acquired with it. The success of the enterprise will naturally depend on the success in solving the problems.
Strategic alliance has been becoming more and more popular in international business. Also known by such names as entente and coalition, this strategy seeks to enhance the long-term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other, The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to market and technological changes.
Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market for marketing or distributing the former’s products. A US pharmaceutical firm may use the sales promotion and distribution infrastructure of a Japanese pharmaceutical firm to sell its products in Japan. In return, the Japanese firm can use the same strategy for the sale of its products in the U.S. market Strategic alliance, more than an entry strategy, is a competitive strategy.
Several areas of business from R and D to distribution provide scope for alliance. Whether it is in R and D, manufacturing or marketing, an important objective of the collaboration is to maximize marginal contribution to fixed cost.
Counter trade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods and paid for by export of goods, instead of money payments. In the modern economies, most transactions involve monetary payments and receipts, either immediate or deferred.
As against this, counter-trade refers to a variety of unconventional international trade practices which link exchange of goods directly or indirectly in an attempt to dispense with currency transactions.
Although the major reason for the substantial growth of counter-trade is its use as a strategy to increase exports, particularly by the developing countries, counter-trade has been successfully used by a number of companies as an entry strategy. For example, Pepsi Co gained witty to the USSR by employing this strategy.