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 5 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 7 Exhibit 9-3: Opportunity Matrix for Henkel in Asia Pacific Chapter 9 Copyright (c) 2009 John Wiley & Sons, Inc. 8 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. 10 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 11 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 12 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 15 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 16 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 19 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 20 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) 24 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? 26 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 28 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) 30 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 34 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 35 Exhibit 9-11: Advantages and Disadvantages of Different Modes of Entry Chapter 9 Copyright (c) 2007 John Wiley & Sons, Inc. 36