Presentation on theme: "Monday 9:00 room 822 Lecturer: Michael Cooke office IC room 817"— Presentation transcript:
1 Monday 9:00 room 822 Lecturer: Michael Cooke office IC room 817 Khon Kaen University International College International Product and Pricing Strategy Course number First semester 2013Monday 9:00 room 822 Lecturer: Michael Cooke office IC room 817
2 The entry and expansion strategies of the US-based Yum. Brands Inc The entry and expansion strategies of the US-based Yum! Brands Inc. (Yum) in ChinaBefore 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.
3 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 StrategiesChapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
4 IntroductionEntry 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 inthe entered marketsChapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
5 Target Market Selection - Example Select indicators and collect dataStarbucks uses availability of good JV partnersSome look for industry trendsetter countriesDetermine importance of country indicatorsAssign a weight for each indicatorCreate a matrix (figure 9-2)Rate the countries in the pool on each indicatorAssign a numeric score to each country on each indicatorUse a scale to determine the scoreCompute overall score for each countryMultiply the score times the weightAdd the weighted scores
6 Exhibit 9-2: Method for Prescreening Market Opportunities Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
7 External Criteria for Choosing the Mode of Entry Market Size and Growth – companies justify large resource commitments if markets grow rapidlyRisk – with higher political and economic risk companies are less likely to commit resourcesGovernment RegulationsLocal content regulationsIn certain industries foreign ownership is barred (airlines, telecom)Trade regulationsCompetitive EnvironmentLink with a strong local presence in a highly competitive environmentJoint ventureAlliancesBuy a dominant local firmLocal Infrastructure (distribution, communication, transport). Companies commit fewer resources when infrastructure is poor.(Exhibit 9-3.)Chapter 9
8 Exhibit 9-3: Opportunity Matrix for Henkel in Asia Pacific Chapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
9 Choosing the Mode of Entry - Classification of Markets Platform Countries (Singapore & Hong Kong)Gather intelligenceEstablish a networkEmerging Countries (Vietnam, Philippines)Build an initial presenceLiaison officesGrowth Countries (China & India)Early mover advantagesFuture market opportunitiesMaturing countries (South Korea, Taiwan)Sizable middle class, good infrastructureEstablished local competitors(Exhibit 9-4.)Chapter 9
10 Exhibit 9-4: Entry Modes and Market Development Chapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
11 Internal Criteria for Choosing the Mode of Entry Company ObjectivesAmbitious companies commit more for greater controlFirms with limited goals or resources invest littleNeed for ControlTrade off between level of control and resources committedControl may be desirable in any aspect of the business or marketingFinancial and Human Resources, Assets, and CapabilitiesWith limited assets choose exporting or licensingAlso weigh risk against amount company can commitFlexibility of the entry mode (when the environment changes)JVs and licensing tend to offer less flexibilitySubsidiaries hard to divest when exit barriers existMode of Entry Choice: Transaction Cost ExplanationBenefits of increased control come with costs of additional resources and higher riskWhen intellectual property is valuable, high control is best
12 A general rule about risk Total company risk is not the same across companiesCompanies with more resources or a broad portfolio can afford to lose more in a given ventureEarly China entrants were large well funded companies with several productsYum! BrandsAIGEarly entrants had extensive experience in foreign markets (deep human resources)Companies with more experience in an area can better manage risksCompanies will always assess the risk of entry in the context of their own situation and tolerance for losses
13 A Study of Criteria for Choosing the Mode of Entry Entry with wholly owned subsidiaries (high control)High R&D businessHigh brand equity businessThe company has high foreign entry experienceEntry via partnershipsRisky countryLegal restrictions on foreign ownership of assetsThe country is culturally and socially distant
14 Exporting – Three levels of engagement Indirect Exporting – use of intermediariesExport merchant trading companiesTake ownership of merchandise for resaleUsually specialized in a product and regionExport agent trading companiesDoes not take ownership of merchandiseCommission basedExport management companies (EMC)Indirect exporting advantagesForeign market expertiseFirms understand export paperworkLow commitment of resourcesIndirect exporting disadvantagesLack of control over marketingTypical EMCs are small firms and often lack resourcesCooperative Exporting – use distribution networks of another companyDirect ExportingFirms set up their own exporting departmentsHigh resource demands (marketing, documentation, shipping, etc.)High control and engagement in international operations
15 Licensing Licensor receives royalties for use of knowledge assets Licensee pays royalties fees to use the assetsCross licensing is where companies share intellectual propertyBenefits of licensingLow commitment of resourcesAppealing to small companies that lack resourcesNo import barriersLow exposure to political and economic risksRapid penetration of the global marketsRisks from licensingRevenue may be lower than with other entry modesLicensee may not be committedLack of control over licensee can result in bad imageLicensee may become a future competitorReduce risks through patents, trademarks, analysis, and carefully worded contracts
16 FranchisingFranchisor gets royalty payments for use of intellectual property in a designated area for a specific timeFranchisee pays royalties and other paymentsNote the supply chain clause in Papa John’s (Exhibit 9-6)Potential for mark-up, also ensures qualityMaster franchising often used in foreign marketsMaster franchise gets right to sell local franchises in a territoryMaster franchise usually commits to a target numberBenefits:Overseas expansion with a minimum investmentFranchisees’ profits tied to their effortsAccess to local franchisees’ knowledge of the local laws and customsRisks:Revenues may be lower than with other modesLack of a master franchiseeLimited franchising opportunities overseasLack of control over the franchisees’ operationsCultural problemsPhysical distance
17 Exhibit 9-5: International Efforts of Ten Franchise Companies Chapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
18 Exhibit 9-6: International Franchising with Papa John’s Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
19 Contract Manufacturing (Outsourcing) Companies specialize in manufacturing for other companiesBenefits:Labor cost advantagesTax, energy, raw materials, and overhead savingsLower political and economic riskFocus on core competencies (such as product design, marketing)Access to manufacturing expertiseQuicker access to markets (no need to build factories)Risks:Contract manufacturer may become a future competitorConflicts of interest if the manufacturer has productsMay lack flexibility (contractor often has other commitments)Backlash from the company’s home-market employees regarding HR and labor issuesIssues of quality and production standardsReducing the risksKeep proprietary design item manufacture in-houseHave contingency plans for changes in demand
20 Contract Manufacturing (Outsourcing) Qualities of An Ideal Subcontractor:Flexible/geared toward just-in-time deliveryAble to integrate with company’s businessAble to meet quality standardsSolid financial footingsMust have contingency plans for changes in demandContract manufacturers typically have multiple clientsIn most cases the manufacturer has to balance client needsNo conflicts of interestMajor contract manufacturers (electronics total $360bb in 2011):Hon Hai (Foxconn) Taiwan Electronics $102BBFlextronics Singapore Electronics $29BBJabil Circuit USA Electronics $17BBTSMC Taiwan Semiconductors $14BBCelestica Canada Electronics $7BBCatalent USA Pharma $2BB
21 Joint Ventures Cooperative joint venture No equity in the venture Involves collaborationCommon among large multinationals with emerging market partnersEquity joint venture – partners have equity stakesBenefits:Higher rate of return and more control over the operationsShared capital and riskSharing of expertise and other resourcesAccess to distribution networkContact with local suppliers and government officials
22 Joint Ventures Risks: Lack of control Partner can become competitor Government restrictions often forbid majority stakeMultinationals can deploy expatriates for greater controlPartner can become competitorConflicts 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 conflictChapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
23 Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
24 Successful Joint Ventures Screen for the right partner (Exhibit 9-8)Obtain information about the partnerSee if the partner has similar investment objectivesEstablish clear objectives from the beginningBridge cultural gaps (perhaps with a middleman)Gain top managerial commitment and respectUse 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)
25 Exhibit 9-8: Starbuck’s Coffee’s Partner Criteria Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
26 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?
27 Wholly Owned Subsidiaries Acquisitions and MergersQuick access to local markets by buying an existing companyGood way to get access to the local brandsGreenfield OperationsEntire operation is developed by the multinationalOffers the company more flexibility than acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology.Chapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
28 Henkel’s Entry into the USA Henkel AG founded in Germany 1876Silicate detergentsFirst major international expansion 1883Armour and Company begins to make soap in Chicago 1888By-product of Armour’s meat packing businessNote similarities with P&G’s origins in CincinnatiDial soap became very popular in the 1950sArmour acquired by Greyhound Corporation 1970Armour-Dial was the consumer products divisionHQ moved from Chicago to Arizona in 1971Dial Corporation created in 1996 restructuringDial Corporation had several top management changesHenkel buys Dial Corporation in 2004 for $2.9BB (Dial sales $1.3BB)Value for money segment *Products well suited to developing marketsDial soaps and detergents introduced in Russia and China 2005Purchase of certain Proctor and Gamble product lines for $275MM in 2006In ‘Marketing Products and Services’ later in the courseIdea is to adapt a product to the host country market via purchase of business*
29 Wholly Owned Subsidiaries Benefits:Greatest control and higher profitsHost market perceives strong commitment to the local market by the companyAllows the investor to manage and control marketing, production, and sourcing decisionsOften faster to set up than a joint ventureRisks:Risks of full ownership, such as absorbing all lossesDeveloping a foreign presence without the support of a third partyRisks of currency devaluation, nationalization or expropriationIssues of cultural and economic sovereignty of the host country (reduce this risk by local hiring, sourcing)Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
30 Strategic AlliancesCoalition of organizations to achieve goals for mutual benefitCan be licensing, joint ventures, R&D partnershipsCan be informalTypes of Strategic AlliancesSimple licensing agreements between two partnersMarket-based alliances (distribution channels, trademarks)Operations and logistics alliancesOperations-based alliances (sharing of manufacturing ideas)The Logic Behind Strategic AlliancesDefend leading position by access to new ideas, markets, etcCatch-Up by joining forcesRemain in a leading business that is not core to the parentRestructure a non-core business (which may be acquired by the alliance partner)
31 Cross-Border Alliances that Succeed Alliances between strong and weak seldom work.Autonomy and flexibilityAlliance needs distinct management and directorsSpeeds up decision making and makes easier conflict resolutionPartners are equally committed to successOther factors:Commitment and support of the top of the partners’ organizationsStrong alliance managers are the keyAlliances between partners that are related in terms of products, technologies, and marketsHave similar cultures, asset sizes and venturing experienceTend to start on a narrow basis and broaden over timeA shared vision on goals and mutual benefitsChapter 9Copyright (c) 2009 John Wiley & Sons, Inc.
32 Timing of Entry Products are not always pioneered in the home market Firms tend to be early market entrants whenThey are large firmsThey have international expertiseThey have a broad scope of products or servicesWhen host countries have favorable risk dimensionsWhen market entry requires little capitalFirms tend to enter markets similar to markets in which they already have experienceNote all of the above factors tend to reduce risk to the firmLate entrants may have more favorable business conditions in developing countries
33 Exhibit 9-10: Wal-Mart’s International Expansion Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.
34 Exit Strategies – Reasons for Exit Sustained losses or difficulty in gaining market shareVolatile host country political or economic environmentPremature entryPoor host country infrastructureLack of strong local partnersEthical reasonsIntense competitionAttractive markets bring competitorsOvercapacity and price warsResource reallocationMoving resources to areas with highest potential returnCompany decides to pull back from international operations
35 Exit Strategies Risks of Exit Guidelines for contemplated exit Fixed costs of exitLabor lawsContractual commitmentsDisposition of assetsDamage to company imageCompany appears uncommitted to overseas marketsDamage to image in host countryLong-term opportunities missed (upside of volatility)Guidelines for contemplated exitAssess options to save the foreign businessChange performance targets (perhaps look to longer term)Consider alternative (local) sourcesRepositioning (maybe go after a niche market)Incremental exit via licensing or temporary shutdownMigrate customers to third parties
36 Exhibit 9-11: Advantages and Disadvantages of Different Modes of Entry Chapter 9Copyright (c) 2007 John Wiley & Sons, Inc.