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Khon Kaen University International College
International Product and Pricing Strategy
Course number 052 201 - First semester 2013
Monday 9:00 room 822
Lecturer: Michael Cooke
office IC room 817
The entry and expansion strategies of the US-based
Yum! Brands Inc. (Yum) in China
 Before entering China, Pizza Hut and KFC had met with success in
Thailand, which became one of the company's top ten markets. Pizza Hut
was launched in Thailand in 1980, when neither pizza nor cheese was
popular; but by the end of the decade, it had made its mark in the Thai
fast food market. The company was also successful in Japan.
 Yum entered China in the year 1987, when the Chinese economy had
started reaping the benefits of liberalization. Being one of the early players
in restaurants business, Yum was able to establish itself firmly in the
Chinese market.
 Yum provided Chinese consumers, a new dining experience through clean
ambiance and quick service. Its menu in China included the dishes it
served in the western countries and also some local dishes. In each of the
provinces Yum operated, it served cuisine which was preferred there. Other
factors like employing local people in key positions, franchisee relationships
and its own distribution and logistics network contributed to the success of
Yum in China.
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR266.htm
2
Week 6 - Global Market Entry Modes Overview
1. Target Market Selection
2. Choosing the Mode of Entry
3. Exporting
4. Licensing
5. Franchising
6. Contract Manufacturing (Outsourcing)
7. Expanding through Joint Ventures
8. Wholly Owned Subsidiaries
9. Strategic Alliances
10. Timing of Entry
11. Exit Strategies
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
3
Introduction
 Entry decisions will heavily influence the firm’s other
marketing-mix decisions.
 Global marketers have to make a multitude of decisions
regarding the entry mode which may include:
 (1) the target product/market
 (2) the goals of the target markets
 (3) the mode of entry
 (4) The time of entry
 (5) A marketing-mix plan
 (6) A control system to check the performance in
the entered markets
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
4
Target Market Selection - Example
Select indicators and collect data
1.


Starbucks uses availability of good JV partners
Some look for industry trendsetter countries
Determine importance of country indicators
2.


Assign a weight for each indicator
Create a matrix (figure 9-2)
Rate the countries in the pool on each indicator
3.


Assign a numeric score to each country on each indicator
Use a scale to determine the score
4. Compute overall score for each country

Multiply the score times the weight

Add the weighted scores
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Exhibit 9-2: Method for Prescreening
Market Opportunities
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
6
External Criteria for Choosing the Mode of Entry
 Market Size and Growth – companies justify large resource
commitments if markets grow rapidly
 Risk – with higher political and economic risk companies are less
likely to commit resources
 Government Regulations



Local content regulations
In certain industries foreign ownership is barred (airlines, telecom)
Trade regulations
 Competitive Environment
 Link with a strong local presence in a highly competitive environment
 Joint venture
 Alliances
 Buy a dominant local firm
 Local Infrastructure (distribution, communication, transport).
Companies commit fewer resources when infrastructure is poor.
(Exhibit 9-3.)
Chapter 9
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Exhibit 9-3: Opportunity Matrix for Henkel in Asia Pacific
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
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Choosing the Mode of Entry - Classification of Markets




Platform Countries (Singapore & Hong Kong)
 Gather intelligence
 Establish a network
Emerging Countries (Vietnam, Philippines)
 Build an initial presence
 Liaison offices
Growth Countries (China & India)
 Early mover advantages
 Future market opportunities
Maturing countries (South Korea, Taiwan)
 Sizable middle class, good infrastructure
 Established local competitors
(Exhibit 9-4.)
Chapter 9
9
Exhibit 9-4: Entry Modes and Market Development
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
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Internal Criteria for Choosing the Mode of Entry
 Company Objectives
 Ambitious companies commit more for greater control
 Firms with limited goals or resources invest little
 Need for Control
 Trade off between level of control and resources committed
 Control may be desirable in any aspect of the business or marketing
 Financial and Human Resources, Assets, and Capabilities
 With limited assets choose exporting or licensing
 Also weigh risk against amount company can commit
 Flexibility of the entry mode (when the environment changes)
 JVs and licensing tend to offer less flexibility
 Subsidiaries hard to divest when exit barriers exist
 Mode of Entry Choice: Transaction Cost Explanation
 Benefits of increased control come with costs of additional
resources and higher risk
 When intellectual property is valuable, high control is best
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A general rule about risk
 Total company risk is not the same across companies
 Companies with more resources or a broad portfolio can
afford to lose more in a given venture


Early China entrants were large well funded companies with
several products
 Yum! Brands
 AIG
Early entrants had extensive experience in foreign markets
(deep human resources)
 Companies with more experience in an area can better
manage risks
 Companies will always assess the risk of entry in the
context of their own situation and tolerance for losses
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A Study of Criteria for Choosing the Mode of Entry
 Entry with wholly owned subsidiaries (high control)
 High R&D business
 High brand equity business
 The company has high foreign entry experience
 Entry via partnerships
 Risky country
 Legal restrictions on foreign ownership of assets
 The country is culturally and socially distant
13
Exporting – Three levels of engagement
 Indirect Exporting – use of intermediaries
 Export merchant trading companies
 Take ownership of merchandise for resale
 Usually specialized in a product and region
 Export agent trading companies
 Does not take ownership of merchandise
 Commission based
 Export management companies (EMC)
 Indirect exporting advantages
 Foreign market expertise
 Firms understand export paperwork
 Low commitment of resources
 Indirect exporting disadvantages
 Lack of control over marketing
 Typical EMCs are small firms and often lack resources
 Cooperative Exporting – use distribution networks of another company
 Direct Exporting
 Firms set up their own exporting departments
 High resource demands (marketing, documentation, shipping, etc.)
 High control and engagement in international operations
14
Licensing




Licensor receives royalties for use of knowledge assets
Licensee pays royalties fees to use the assets
Cross licensing is where companies share intellectual property
Benefits of licensing
 Low commitment of resources
 Appealing to small companies that lack resources
 No import barriers
 Low exposure to political and economic risks
 Rapid penetration of the global markets
 Risks from licensing
 Revenue may be lower than with other entry modes
 Licensee may not be committed
 Lack of control over licensee can result in bad image
 Licensee may become a future competitor
 Reduce risks through patents, trademarks, analysis, and carefully worded
contracts
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Franchising
 Franchisor gets royalty payments for use of intellectual property in a
designated area for a specific time
 Franchisee pays royalties and other payments
 Note the supply chain clause in Papa John’s (Exhibit 9-6)
 Potential for mark-up, also ensures quality
 Master franchising often used in foreign markets
 Master franchise gets right to sell local franchises in a territory
 Master franchise usually commits to a target number
 Benefits:
 Overseas expansion with a minimum investment
 Franchisees’ profits tied to their efforts
 Access to local franchisees’ knowledge of the local laws and customs
 Risks:
–
–
–
–
–
–
Revenues may be lower than with other modes
Lack of a master franchisee
Limited franchising opportunities overseas
Lack of control over the franchisees’ operations
Cultural problems
Physical distance
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Exhibit 9-5: International Efforts of Ten Franchise Companies
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
17
Exhibit 9-6: International Franchising with Papa John’s
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
18
Contract Manufacturing (Outsourcing)
 Companies specialize in manufacturing for other companies
 Benefits:






Labor cost advantages
Tax, energy, raw materials, and overhead savings
Lower political and economic risk
Focus on core competencies (such as product design, marketing)
Access to manufacturing expertise
Quicker access to markets (no need to build factories)
 Risks:
Contract manufacturer may become a future competitor
Conflicts of interest if the manufacturer has products
May lack flexibility (contractor often has other commitments)
Backlash from the company’s home-market employees regarding HR and labor
issues
 Issues of quality and production standards




 Reducing the risks
 Keep proprietary design item manufacture in-house
 Have contingency plans for changes in demand
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Contract Manufacturing (Outsourcing)
 Qualities of An Ideal Subcontractor:
 Flexible/geared toward just-in-time delivery
 Able to integrate with company’s business
 Able to meet quality standards
 Solid financial footings
 Must have contingency plans for changes in demand


Contract manufacturers typically have multiple clients
In most cases the manufacturer has to balance client needs
 No conflicts of interest
 Major contract manufacturers (electronics total $360bb in 2011):
 Hon Hai (Foxconn)
Taiwan
Electronics
$102BB
 Flextronics
Singapore
Electronics
$29BB
 Jabil Circuit
USA
Electronics
$17BB
 TSMC
Taiwan
Semiconductors $14BB
 Celestica
Canada
Electronics
$7BB
 Catalent
USA
Pharma
$2BB
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Joint Ventures
 Cooperative joint venture
 No equity in the venture
 Involves collaboration
 Common among large multinationals with emerging
market partners
 Equity joint venture – partners have equity stakes
 Benefits:
 Higher rate of return and more control over the
operations
 Shared capital and risk
 Sharing of expertise and other resources
 Access to distribution network
 Contact with local suppliers and government officials
21
Joint Ventures
 Risks:
 Lack of control


Government restrictions often forbid majority stake
Multinationals can deploy expatriates for greater control
 Partner can become competitor
 Conflicts arising over matters such as strategies,
resource allocation, transfer pricing, and ownership of
assets like technologies and brand names (Exhibit 9-7)
 Well planned agreements help reduce conflict
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
22
Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
23
Successful Joint Ventures
 Screen for the right partner (Exhibit 9-8)
 Obtain information about the partner
 See if the partner has similar investment objectives
 Establish clear objectives from the beginning
 Bridge cultural gaps (perhaps with a middleman)
 Gain top managerial commitment and respect
 Use an incremental approach (start on small scale)
 Create a launch team during the launch phase:
(1) Build and maintain strategic alignment
(2) Create a system for parent company oversight
(3) Manage the compensation of each parent
(4) Build the organization for the joint venture (assign
responsibilities)
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Exhibit 9-8: Starbuck’s Coffee’s Partner Criteria
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
25
Starbucks Expansion in Asia
 Which areas and segments has Starbucks been targeting?
 Why does Starbucks use joint ventures to enter a market?
 What type of JV does Starbucks typically use?
 How else does Starbucks reduce the risks of market entry?
 Does Starbucks customize marketing or product for local
markets?
 How did Starbucks alter strategy for China? Why did it alter
strategy?
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Wholly Owned Subsidiaries
 Acquisitions and Mergers
 Quick access to local markets by buying an existing
company
 Good way to get access to the local brands
 Greenfield Operations
 Entire operation is developed by the multinational
 Offers the company more flexibility than acquisitions in
the areas of human resources, suppliers, logistics, plant
layout, and manufacturing technology.
Chapter 9
Copyright (c) 2009 John Wiley & Sons, Inc.
27
Henkel’s Entry into the USA
 Henkel AG founded in Germany 1876
 Silicate detergents
 First major international expansion 1883
 Armour and Company begins to make soap in Chicago 1888
 By-product of Armour’s meat packing business


Note similarities with P&G’s origins in Cincinnati
Dial soap became very popular in the 1950s
 Armour acquired by Greyhound Corporation 1970
 Armour-Dial was the consumer products division
 HQ moved from Chicago to Arizona in 1971
 Dial Corporation created in 1996 restructuring
 1997- 2004 Dial Corporation had several top management changes
 Henkel buys Dial Corporation in 2004 for $2.9BB (Dial sales $1.3BB)
 Value for money segment *
 Products well suited to developing markets
 Dial soaps and detergents introduced in Russia and China 2005
 Purchase of certain Proctor and Gamble product lines for $275MM in 2006
 In ‘Marketing Products and Services’ later in the course
 Idea is to adapt a product to the host country market via purchase of business
* http://www.businessweek.com/stories/2005-06-26/online-extra-henkel-dial-ing-for-growth
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Wholly Owned Subsidiaries
 Benefits:




Greatest control and higher profits
Host market perceives strong commitment to the local
market by the company
Allows the investor to manage and control marketing,
production, and sourcing decisions
Often faster to set up than a joint venture
 Risks:




Chapter 9
Risks of full ownership, such as absorbing all losses
Developing a foreign presence without the support of a
third party
Risks of currency devaluation, nationalization or
expropriation
Issues of cultural and economic sovereignty of the host
country (reduce this risk by local hiring, sourcing)
Copyright (c) 2007 John Wiley & Sons, Inc.
29
Strategic Alliances
 Coalition of organizations to achieve goals for mutual benefit
 Can be licensing, joint ventures, R&D partnerships
 Can be informal
 Types of Strategic Alliances




Simple licensing agreements between two partners
Market-based alliances (distribution channels, trademarks)
Operations and logistics alliances
Operations-based alliances (sharing of manufacturing ideas)
 The Logic Behind Strategic Alliances




Defend leading position by access to new ideas, markets, etc
Catch-Up by joining forces
Remain in a leading business that is not core to the parent
Restructure a non-core business (which may be acquired by the
alliance partner)
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Cross-Border Alliances that Succeed
 Alliances between strong and weak seldom work.
 Autonomy and flexibility


Alliance needs distinct management and directors
Speeds up decision making and makes easier conflict resolution
 Partners are equally committed to success
 Other factors:






Chapter 9
Commitment and support of the top of the partners’
organizations
Strong alliance managers are the key
Alliances between partners that are related in terms of
products, technologies, and markets
Have similar cultures, asset sizes and venturing experience
Tend to start on a narrow basis and broaden over time
A shared vision on goals and mutual benefits
Copyright (c) 2009 John Wiley & Sons, Inc.
31
Timing of Entry
 Products are not always pioneered in the home market
 Firms tend to be early market entrants when
 They are large firms
 They have international expertise
 They have a broad scope of products or services
 When host countries have favorable risk dimensions
 When market entry requires little capital
 Firms tend to enter markets similar to markets in which they
already have experience
 Note all of the above factors tend to reduce risk to the firm
 Late entrants may have more favorable business conditions
in developing countries
32
Exhibit 9-10: Wal-Mart’s International Expansion
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
33
Exit Strategies – Reasons for Exit
 Sustained losses or difficulty in gaining market share
 Volatile host country political or economic environment
 Premature entry


Poor host country infrastructure
Lack of strong local partners
 Ethical reasons
 Intense competition


Attractive markets bring competitors
Overcapacity and price wars
 Resource reallocation


Moving resources to areas with highest potential return
Company decides to pull back from international operations
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Exit Strategies
 Risks of Exit
 Fixed costs of exit


Labor laws
Contractual commitments
 Disposition of assets
 Damage to company image
 Company appears uncommitted to overseas markets
 Damage to image in host country
 Long-term opportunities missed (upside of volatility)
 Guidelines for contemplated exit
 Assess options to save the foreign business



Change performance targets (perhaps look to longer term)
Consider alternative (local) sources
Repositioning (maybe go after a niche market)
 Incremental exit via licensing or temporary shutdown
 Migrate customers to third parties
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Exhibit 9-11: Advantages and Disadvantages of
Different Modes of Entry
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
36

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