CHAPTER 5

GLOBAL ORIENTATION TO BUSINESS

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 Chapter Content

• Competing on a Global Basis

• Deciding Whether to Go Abroad
• Deciding Which Markets to
Enter
• Deciding How to Enter the
Market
• Deciding on the Marketing
Program

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 Competing on a Global Basis
• Two hundred giant corporations, most larger than many
national economies, together have sales that exceed a
quarter of the world's economic activity.
• Altria, including its main subsidiary Philip Morris, is about
the same size as the economy of NewZealand and
operates in over 160 countries. Exports accounted for over
one-quarter of U.S. GDP growth in 2006.
• Many companies have conducted international marketing
for decades-firms such as Nestle, Shell, Bayer, and Toshiba
have been familiar around the world for years. But global
competition is intensifying as new firms make their mark
on the international stage. "Breakthrough Marketing:
Samsung" describes the swift global ascent of that
company.
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 Cont’d….
• Some U.S. businesses may want to eliminate foreign
competition through protective legislation, the better
way to compete is to continuously improve products at
home and expand into foreign markets.
• In a global industry, competitors' strategic positions in
major geographic or national markets are affected by
their overall global positions.
• A global firm operates in more than one country and
captures R&D, production, logistical, marketing, and
financial advantages not available to purely domestic
competitors.
• Global firms plan, operate, and coordinate their
activities on a worldwide basis.
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 Deciding Whether to Go Abroad
• Most companies would prefer to remain
domestic if their domestic market were large
enough. Managers would not need to learn
other languages and laws, deal with volatile
currencies, face political and legal
uncertainties, or redesign their products to
suit different customer needs and
expectations. Business would be easier and
safer.
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 Cont’d….
• Yet several factors draw companies into the
international arena:
– Some international markets present higher profit
opportunities than the domestic market.
– The company needs a larger customer base to
achieve economies of scale.
– The company wants to reduce its dependence on
anyone market.
– The company decides to counterattack global
competitors in their home markets.
– Customers are going abroad and require
international service.
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 Cont’d….
• Before making a decision to go abroad, the
company must be aware of and weigh several
risks:
– The company might not understand foreign
preferences and could fail to offer a competitively
attractive product.
– The company might not understand the foreign
country's business culture.
– The company might underestimate foreign regulations
and incur unexpected costs.
– The company might lack managers with international
experience.
– The foreign country might change its commercial laws,
devalue its currency, or undergo a political revolution
and expropriate foreign property.
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 Cont’d….
• Some companies don't act until events thrust
them into the international arena.
• The internationalization process typically has four
stages:
1. No regular export activities
2. Export via independent representatives (agents)
3. Establishment of one or more sales subsidiaries
4. Establishment of production facilities abroad

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 DECIDING WHICH MARKETS TO ENTER
• In deciding to go abroad, the company needs to define its
marketing objectives and policies. What proportion of
international market sales to total sales will it seek?

• Country attractiveness:
• geographic factor
• income and population
• political climate and product choice
 How Many Markets to Enter
• How many countries to enter ?
– Few countries
– Many countries:
–Consider:
• high cost
• population size and income
• competition
• How fast to expand : Typical entry strategies
– the waterfall approach, gradually entering countries in
sequence,
– the sprinkler approach, entering many countries
simultaneously. 10
Waterfall approach
It allows firms to carefully plan expansion and is less
likely to strain human and financial resources.
Matsushita, BMW, General Electric, Benetton, and The
Body Shop followed this approach.

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Sprinkler approach
is better when first-mover advantage is crucial and a high
degree of competitive intensity prevails, such as when Microsoft
introduces a new version of Windows software
The main risk is the substantial resources needed and the
difficulty of planning entry strategies into many diverse
markets.

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 Evaluating Potential Markets
• It often makes sense to operate in fewer countries,
with a deeper commitment and penetration in
each.
• In general, a company prefers to enter countries
– (1) that rank high on market attractiveness,
– (2) that are low in market risk
– (3) in which it possesses a competitive advantage.
• E.g.. of how Bechtel Corporation, the construction giant, goes
about evaluating overseas markets.

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 Deciding How to Enter the Market

• There are various formats of entering into

international market. It ranges from the simplest
export to foreign direct investment which is more
complex and risky to enter in foreign market.
• The risk of entering in international market comes
from the capital requirement to enter, the control it
provides to operation of parent firm and the political
risks.

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 Cont’d…..
• The firm can either export the product from home market to
international market or the firm might invest in foreign market
on facility, raw material, and other factor of production and
make the product and offer to the foreign market.
• We can divide entry modes into three broad category, these
are:
• Export
• Contract based
• Non Contract based

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 Exporting
• Firms have two alternatives in exporting products to
international market. These are: direct and, indirect
exporting.
• In indirect involvement firms participate in
international businesses through an intermediary.
• In direct exporting firms are in interrelationships with
foreign customers and markets.
– Firms use own exporting when there is no
domestic or foreign middleman between the
producer and end customer.
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 Exporting strategies benefits

• The rapidity of international market entry, and not

required investment in establishing operations in the
host country
• Offers for a firm a low risk and simple way to begin its
international process and meet the demand and
challenges.
• Exporting is usually small company and management
commitment.
• Complete control over production and products;

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 Disadvantages of Exporting
• High cost of transportation and possible tariffs placed on
incoming goods.
• The exporter has less control over the marketing and
distribution of its products in the target country
• The distributor takes part of the profits either in the form of
pay or adding extra to the price.
• It gives -up of any potential location economies.

Therefore, exporting is appropriate when there is a

low trade barrier, home location has an advantage on
costs and when customization is not crucial.

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 Cont’d….
• There are various reasons for firms to just take other
alternatives than exporting.
• Reasons that might force for looking beyond exporting.
– Overcoming trade barriers
– Reducing tariffs by having local content
– Reducing transport and production costs
– Utilizing more favorable production conditions
– Being closer to your market reduce transportation cost
– Better market credibility
– Achieving better market penetration
– Reaching more markets

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 Contract based
• Contractual entry modes are long-term non-equity associations
between an international company and entity in a foreign target
country.
• The primarily difference between a contractual entry mode
and an export entry is that contractual entry modes are
vehicles for the transfer of knowledge and skills.
• Contractual entry modes are distinguished from the entry
modes that need investment, because there is no equity
investment by the international company.
• There exist many different contractual entry modes, such as
licensing, franchising, and numerous contract based entry
modes

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 Licensing
• Licensing is a form of contractual agreement in which the
licensor permits the licensee to use its intellectual property
(such as patents, trademarks, copyrights, technology, technical
know-how, marketing skill or some other specific skill) in lieu of
royalty.
• The monetary benefit to the licensor is the royalty or fees
which licensee pays.
• In many countries, such fees or royalties are regulated by the
government; it does not exceed five per cent of the sales in
many developing countries.
• A licensing agreement may also be one of cross licensing,
wherein there is a mutual exchange of knowledge and /or
patents.
– In cross-licensing, a cash payment may or may not, be involved.
• Licensing agreements can harness the production and
financial strength of well-established companies to the
innovative flair of small and medium-sized organizations. 21
 The advantages of licensing

• The risk of expropriation decreases because the licensee is a

local company that can provide leverage against government
action.
• Provide a method by which foreign markets can be tested
without major involvement of capital or company
commitment.
• The evasion of import barriers that increase the cost (tariffs)
or quotas of exports on the target market.
• Licensing is a lower political risk than with an equity
investment.
• Expand returns based on previous innovations

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 Disadvantages of Licensing
• The licensor’s lack of control over the marketing plan and
program in the target country.
• Licensing entry mode includes most limited amount of foreign
market participation and does not in any way guarantee a basis
for future expansion.
• Licensing contains also the risk that in exchange of royalty, the
licensor may create its own competitor not only in the market
for which the agreement was made but for third country
markets as well.
• income from licensing arrangement as compared to that from
exporting to, or investing in, the target country is a low.
• Create some inflexibility, if a firm wants to move to a different
ownership arrangement.
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 Franchising
• 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.
• This right can take the form of selling the franchisor’s products,
‘using its name, production and marketing techniques, or general
business approach.
• One of the common forms of franchising involves the franchisor
supplying an important ingredient (part, material etc.) for the
finished product, like the Coca Cola supplying the syrup to the
bottlers.

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 Cont’d…..
• The major forms of franchising are manufacturer-retailer
systems (such as automobile dealership), manufacturer
wholesaler systems (such as soft drink companies), and service
firm-retailer systems (such as lodging services and fast food
outlets).
• When franchiser sells the concept, it has set standards to
ensure consistency of the product, service delivery, branding
and marketing.
• A franchise allows a rapid internationalization of the product,
as the capital costs are normally borne by the Franchisee

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 Contract Manufacturing

• Is a contracts with firms in foreign countries to manufacture

or assemble the products while retaining the responsibility
of marketing the product.
• The sale and marketing of the finished product remain your
responsibility, not the manufacturers.
• Your relationship with the manufacturer is essentially a
customer supplier one, except that the product or component
is made to your own specifications, rather than being a
standard item.
• Sometimes it includes final assembly and packaging of the
product, as well as delivery to the point of distribution or
sale.

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 Strategic alliances

• It is a specific form of collaboration between two or more

companies.
• Can provide a means of overcoming the problems of small size
and lack of resources faced by some companies.
• All organizations are not strong in all function of business. To
offset their shortcoming they collaborate with other firms.
• It can apply to virtually any form of collaboration between two
or more firms, for the following activities:
– Design contracts
– Technology transfer agreements
– Joint product development
– Purchasing agreements
– Distribution agreements
– Marketing collaboration
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 Cont’d……
• Generally, each company involved in the strategic alliance will
benefit by working together.
• The arrangement they enter into may not be as formal as a
joint venture agreement.
• Alliances are usually consummated with a written contract,
often with agreed termination points, and do not result in the
creation of an independent business organization.

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 Characteristics of a Strategic Alliance
• Usually a non-equity, loosely structured relationship
• Each partner retains its business independence
• The alliance can be between companies competitors
• The relative size of the partners is not a significant factor
• Each partner must contribute distinctive “core strengths”
e.g. technology

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 Benefits of strategic alliance:
• Increased leverage
• Risk sharing
• Opportunities for growth
• Greater responsiveness

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 Disadvantages of a Strategic Alliance
• High commitment
• Difficulty of identifying a compatible partner
• Potential for conflict
• A small company risks being subsumed by a larger partner
• Strategic priorities change over time
• Payment difficulties
• Political risk in the country where the strategic alliance is
based
• If the relationship breaks down, the cost/ownership of market
information, market intelligence and jointly developed
products can be an issue.

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 Turnkey Projects
• A project in which contractor handles every detail of the
project for a foreign client, including the training of
operating personnel, and then hands over the foreign
clients the “key” to a plant that is ready for
operation.
• Setting up a new plant ready for operation.
• Turnkey projects are most common in the chemical,
pharmaceutical, petroleum refining and metal refining
industries, all of which use complex, expensive
production technologies.

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 Advantages
• This is the best way of earning greater economic returns
from that asset.
• Obtain returns from know-how about a complex
process.
• Government restrictions may limit other options
therefore; this strategy is best in case where FDI is
limited by government.
• Lower risk if unstable economic/political situation in
country

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 Disadvantages:
• The firm that enters into the turnkey deal will have no
long-term interest in the foreign country.
• Less potential to profit from success of plant.
• Creating a competitor by transferring the technical
know-how to a foreign firm.
• Give away technological know-how to potential
competitor

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 Non Contract based

a. Joint Venture
• A joint venture is the long-term commitment of funds, facilities
and services by two or more legally separate interests, to a
combined enterprise for their mutual benefits.
• A joint venture need not be a separate legal entity or
company.
• The essential feature of a joint ownership venture is that the
ownership and management are shared between a
foreign firm and a local firm.

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 The Benefits of a Joint Venture
• Benefit from local firm’s knowledge about the host
country’s competitive Conditions, culture, language,
political systems and business systems.
• shared costs/risks of development of product
• political constraints on other options by host
government will be minimized

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 The Disadvantages of a Joint Venture
• Potentially high capital cost required to establish JV
• It might take much time to get profit
• Difficult to get out of quickly if a partner find the venture
infeasible later
• Working in a different legal and Cultural system might be
source of conflict among partners
• Political risks in the country where the joint venture is
based

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 b. Wholly Owned Subsidiaries:

• In wholly owned subsidiary, the firm owns 100 percent of

the stock.
• Establishing a wholly owned subsidiary in a foreign market
can be done in two ways.
– The firm can either set up a new operation in host country or it
can acquire an established firm and use that firm to promote its
products in the country’s market.

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 Acquisitions

• Acquisition is transferring the local company to foreign owner.

In this the foreign company invests in local firm for 100 percent
ownership on the existing facility.
Advantages of Acquisitions
• It may provide a resource that is scarce (human or managerial
skill) in the target country
• Rapid access to new markets
• Is a good method for a firm to gain market specific experience
quickly
• Favorable in situations with less need for strategic flexibility
and when the transaction is used to maintain economies of scale
or scope.
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 Disadvantages of Acquisitions

• Costs and multiple risks come with an acquisition entry mode.

• Complex international negotiations, the problems dealing with
the legal and regulatory requirements in the target firm’s
country, and problems of merging the new firm into the
acquiring firm.
• High financial commitment, and thus demands more stable
political and commercial climate than those with a smaller
financial commitments.

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 Greenfield investments
• Greenfield investment is investing from scratch. The company
entering in international market will buy land, construct
building and hire people to run the business.
Advantages of the Greenfield investment
• The firm can maintained control over the technology,
marketing, and distribution of its products.
• High returns can be generated especially by firms with strong
intangible capabilities that are possible to generate through a
Greenfield investment.
• Helps to use latest production technologies and opportunity to
build the site to match the company’s exact production
requirements.
• usually only true for firms exploiting the low cost locations.

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 The disadvantages of the Greenfield investment

• Are usually often complex establishing process and potential

high costs.
• Establishing new wholly owned subsidiary takes a lot of time,
and thus is not appropriate for rapid entering in foreign
markets.
• Establishing the Greenfield investment needs also the greatest
contribution of know-how of all the international market
entry alternatives.

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43
 Cont’d…..
• International companies must decide how much to
adapt their marketing strategy to local conditions.
• At one extreme are companies that use a globally
standardized marketing mix worldwide.
Standardization of the product, communication, and
distribution channels promises the lowest costs.
• At the other extreme is an adapted marketing mix,
where the producer, consistent with the marketing
concept, holds that consumer needs vary and tailors
marketing programs to each target group.

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Global /Standardized Marketing Pros
• Economies of scale in production and distribution
• Lower marketing costs
• Power and wider scope
• Consistency in brand image
• Ability to leverage good ideas Quickly and efficiently
• Uniformity of marketing practices

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Global /Standardized Marketing cons
• Ignores differences in consumer needs, wants, and
usage patterns for products
• Ignores differences in consumer response to
marketing-mix elements
• Ignores differences in brand and product
development and the competitive environment
• Ignores differences in the legal environment
• Ignores differences in marketing institutions
• Ignores differences in administrative procedures

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 Product –Promotion strategies
• Warren Keegan has distinguished five
adaptation strategies of product and
communications to a foreign market.

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 Cont’d……
• Price:
• Setting uniform price everywhere.
• Setting a market-base price in each country.
• Setting a cost-base price in each country.
• Setting transfer price:
– Higher price:
» Higher income tax
– Lover price:
» Price dumping
– Arm-length price:
» Competitors price.
– Gray market price.
 Cont’d….

• Place:
– International
marketing
headquarters
– Channels between
nations
– Channels within
foreign nation
 Chapter End

Thank you
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