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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
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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.
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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.
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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.
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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
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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
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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
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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.
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Exhibit 9-6: International Franchising with Papa John’s
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
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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
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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.
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Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.
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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.
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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
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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.
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