An Indian automobile company decided to enter international markets. The company is ready to invest in marketing arrangements abroad, but not in production facilities. Suggest any two suitable modes of market entry, and explain their merits and limitations
For an Indian automobile company looking to enter international markets without investing in production facilities, two suitable modes of market entry are Exporting and Licensing/Franchising.
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Here’s an explanation of each, along with their merits and limitations:
1. Exporting
Description:
Exporting involves selling products made in the home country to customers in international markets. The company can either export directly (selling directly to foreign buyers) or indirectly (using intermediaries such as agents or distributors).
Merits:
- Low Investment: Requires relatively low investment compared to setting up production facilities abroad.
- Market Testing: Allows the company to test international markets and gather insights about demand, competition, and customer preferences without significant financial risk.
- Flexibility: The company can adjust export volumes based on market response and changes in demand.
- Control Over Branding: The company retains control over product quality and branding.
Limitations:
- Trade Barriers: Subject to tariffs, quotas, and other trade restrictions imposed by the foreign market, which can affect competitiveness.
- Logistics and Costs: Exporting involves shipping costs and logistical complexities that can impact profit margins.
- Limited Market Presence: Without a physical presence, it might be challenging to build strong relationships with customers and adapt to local market conditions.
2. Licensing/Franchising
Description:
Licensing involves granting foreign companies the right to produce and sell the company’s products in their markets under the company’s brand name. Franchising is similar but often includes a broader range of business practices, including the company’s entire business model.
Merits:
- Reduced Risk: Licensing and franchising allow the company to enter new markets with lower financial risk, as the foreign licensee or franchisee typically bears the investment in production and operations.
- Local Expertise: The foreign partner brings local market knowledge, which can be valuable for navigating regulatory environments and understanding consumer preferences.
- Revenue Generation: The company earns revenue through licensing fees, royalties, or franchise fees without incurring the costs of setting up production facilities.
Limitations:
- Control Issues: The company has less control over production quality and brand management compared to operating its own facilities.
- Intellectual Property Risks: There is a risk of intellectual property theft or misuse if the licensing or franchising agreements are not well-managed.
- Dependency: The company’s success in the international market depends significantly on the performance and reliability of its licensees or franchisees.
Conclusion
Exporting is a straightforward and cost-effective method for initial market entry with minimal investment, ideal for testing international waters. Licensing/Franchising offers an opportunity to leverage local expertise and reduce financial risks, though it involves less control over operations and quality. Both methods align well with the company’s strategy of avoiding investment in production facilities while still entering international markets.