Illustrate the strategies used in reaching global markets.
Explain the role of multinational corporations.
Overview of Global Market Strategies
Businesses utilize various strategies to compete in global markets, including:
Licensing
Exporting
Franchising
Contract Manufacturing
International Joint Ventures and Strategic Alliances
Foreign Subsidiaries
Foreign Direct Investment (FDI)
Each strategy offers different economic opportunities along with specific commitments and risks.
A continuum illustrates the degree of commitment, control, risk, and profit potential associated with each strategy.
Least Commitment, Control, Risk, Profit Potential: Licensing < Exporting < Franchising < Contract Manufacturing < International Joint Ventures and Strategic Alliances < Foreign Direct Investment (including Foreign Subsidiaries) Most
Licensing
In licensing, a firm (the licensor) allows a foreign company (the licensee) to manufacture its product or use its trademark for a fee (known as a royalty).
Roles:
The licensor often sends representatives to help the licensee establish operations.
The licensor may assist in distribution, promotion, and consulting.
Benefits of Licensing:
Revenue Generation: The licensor can gain revenue from markets it does not penetrate directly.
Cost Savings: Licensees typically pay for start-up supplies, materials, and consulting, minimizing costs for the licensor.
Broad Reach: For example, Coca-Cola's more than 225 licensing agreements yield over 1.9 billion servings sold daily.
Global Reach: Tokyo Disneyland operates under a licensing agreement, demonstrating service-based licensing success.
Risks of Licensing:
Long-Term Commitment: Licensing agreements may extend over 20 years or longer.
Loss of Revenue: If a product grows quickly in the licensee's market, most revenue goes to the licensee.
Intellectual Property Risk: Licensees may learn trade secrets and produce similar products independently if legal protections are weak.
Exporting
Exporting is essential for businesses facing global competition, facilitated by U.S. Export Assistance Centers (EACs) which provide:
Hands-on exporting assistance and trade-finance support for small and medium-sized businesses.
Indirect Exporting:
Export-trading companies help companies negotiate trading relationships, manage customs, documentation, and logistics.
They assist with warehousing, billing, and insurance, easing market entry.
Export-trading companies offer internships and part-time jobs, valuable for career development in global business.
Franchising
Franchising is a contractual relationship whereby a franchisor sells rights to manage a business under its name and sell its products/services in designated territories.
Global Presence: Major U.S. franchises include Subway, Dunkin', and KFC; not exclusive to large companies (e.g., Physique 57 franchises across cities like Abu Dhabi and Manila).
Adaptation Needs: Franchisors need to adapt products/services to local markets:
For example, pizza toppings differ significantly: curry in India, seafood in Japan, and unique donut flavors in China.
Contract Manufacturing
Definition: A foreign company produces goods for a domestic company with the domestic brand attached (Private-label production).
Utilized across various industries including electronics and apparel.
Example Companies: Dell, Apple, IBM, Nike (with 600 factories globally).
Pandemic Impact: The COVID-19 pandemic raised questions about reliability and initiated shifts towards "reshoring" of production (e.g., General Motors, Intel).
Advantages of Contract Manufacturing:
Low Entry Costs: Allows market experimentation without heavy investment in manufacturing infrastructure.
Temporary Solutions: Provides flexibility to ramp up production for unexpected demands.
Cost Efficiency: Often leverages lower labor costs.
International Joint Ventures and Strategic Alliances
Joint Ventures:
Partnerships in which two or more companies contribute resources and share risks to undertake significant projects.
Example: NBCUniversal's theme park in Beijing through a joint venture, receiving acclaim immediately.
Purpose of Joint Ventures:
Shared risk and resources, including technology and management expertise.
Market entry under local production conditions.
Drawbacks of Joint Ventures:
Risk of learning and then bypassing original technology or practices by partners.
Potential obsolescence of shared technology.
Reduced flexibility as joint ventures grow larger.
Strategic Alliances:
Long-term partnerships aimed at creating competitive advantages; don't share costs or profits as joint ventures do.
Example: Walmart and Rakuten's strategic alliance for an e-commerce venture in Japan.
Foreign Direct Investment (FDI)
Definition: FDI involves acquiring permanent properties and business interests in foreign nations.
The most common format is forming foreign subsidiaries by a parent company.
Subsidiaries function like domestic firms and must comply with host country regulations.
Advantages of Foreign Subsidiaries:
Complete control over technology and expertise.
Disadvantages:
Financial commitment and risk related to assets within foreign boundaries.
Possible government expropriation of assets.
Example of MNCS:
Nestlé, providing a range of food products globally with operations across 186 countries, managing over 273,000 employees.
Sovereign Wealth Funds (SWFs):
Investment funds controlled by governments investing in foreign companies or assets; Norway’s SWF leads globally with >$1.37 trillion assets.
Concerns exist regarding geopolitical use of SWFs, including purchasing farmland near military bases.
Summary Remarks
Selecting an appropriate entry strategy is crucial for businesses entering global markets, reflecting varied ownership levels, financial commitments, and risks.
Understanding persistent market forces is also essential for sustaining success in global markets.