BBA MBA NOTES

Different modes or way of engaging in international business are mentioned below.

Exporting

Exporting - Exporting is the process of selling of goods and services produced in one country to other countries. Exporting is the simplest and widely used of entering foreign markets.

There are three types of exporting: Direct Exporting, Indirect Exporting and Intra-Corporate Transfers

Direct Exports

Direct exports represent the most basic mode of exporting made by a (holding) company, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. The main characteristic of direct exports entry model is that there are no intermediaries.

Advantages

·  Control over selection of foreign markets and choice of foreign representative companies

· Good information feedback from target market, developing better relationships with the buyers

· Better protection of trademarks, patents, goodwill, and other intangible property

· Potentially greater sales, and therefore greater profit, than with indirect exporting.

Disadvantages

· Higher start-up costs and higher risks as opposed to indirect exporting

· Requires higher investments of time, resources and personnel and also organizational changes

·Greater information requirements

· Longer time-to-market as opposed to indirect exporting

Indirect exports - Indirect exports are the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market. Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through domestic company.

Advantages
· Fast market access
· Concentration of resources towards production
· Little or no financial commitment as the clients' exports usually covers most expenses associated with international sales.
· Low risk exists for companies who consider their domestic market to be more important and for companies that are still developing their R&D, marketing, and sales strategies.
·  Export management is outsourced, alleviating pressure from management team
·  No direct handle of export processes.

Disadvantages
·  Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting
· Wrong choice of distributor, and by effect, market, may lead to inadequate market feedback affecting the international success of the company
·  Potentially lower sales as compared to direct exporting (although low volume can be a key aspect of successfully exporting directly). Export partners that incorrectly select a specific distributor/market may hinder a firm's functional ability.

Intra-Corporate Transfers

Intra-corporate transfers are selling of products by a company to its affiliated company in Host company. Selling of products by Hindustan Lever in India to Unilever in the USA is example of Intra-Corporate Transfers, this transaction is treated as exports in India and Imports in the USA 

Those companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals.

Factors to be considered

Licensing

International Licensing - An international licensing agreement allows foreign firms, either exclusively or non-exclusively to manufacture a proprietor’s product for a fixed term in a specific market.

Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor earnings usually take forms of one time payments, technical fees and royalty payments usually calculated as a percentage of sales.

Following are the main advantages and reasons to use an international licensing for expanding internationally

·  Obtain extra income for technical know-how and services

·  Reach new markets not accessible by export from existing facilities

·  Quickly expand without much risk and large capital investment

·   Pave the way for future investments in the market

·   Retain established markets closed by trade restrictions

·  Political risk is minimized as the licensee is usually 100% locally owned

·  Is highly attractive for companies that are new in international business.

On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it as:

Franchising

The franchising system can be defined as: “A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.”

Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipment, managerial systems, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business.

Famous franchises in India

Galeto Vinto Ice Creams – Italian brand have maximum number of outlets in India

Archies – Mumbai based firm

Advantages of the international franchising mode:

Disadvantages of the international franchising mode:

Comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support and manage franchisees.

The key success for franchising is to avoid sharing the strategic activity with any franchisee especially if that activity is considered importance to the company. Sharing that strategic activity may increase the potential of the franchisee to be our future competitor due to the knowledge and strategic spill over.

Turnkey projects

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/services/facility and turn the project over to purchaser when it is ready for operation for remunerations.

A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is a way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.

One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of expertise in a specific area exists.

Potential disadvantages of a turnkey project for a company include risk of revealing companies secrets to rivals, and takeover of their plant by the host country. Entering a market with a turnkey project CAN prove that a company has no long-term interest in the country which can become a disadvantage if the country proves to be the main market for the output of the exported process.

Contract Manufacturing

Some companies outsource their or part of production and concentrate on marketing operations. Nike has contracted with a number of factories in south-east Asia to produce its athletic footwear and it concentrate on marketing.

Management Contract