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.
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Here’s a breakdown of each:
1. Exporting
Merits:
- Lower Investment Risk: Exporting allows the company to enter international markets without the need to invest in production facilities abroad, minimizing financial risk.
- Control Over Production: The company retains control over production processes, ensuring that quality standards are maintained according to the company’s specifications.
- Gradual Expansion: Exporting allows the company to gradually expand into foreign markets and gain international experience without significant upfront costs.
Limitations:
- Logistics and Transportation Costs: Exporting involves high logistics and transportation costs, which can increase the final price of the product, potentially making it less competitive in the foreign market.
- Trade Barriers: The company may face trade barriers like tariffs, quotas, and regulations in the target market, complicating the entry process.
- Limited Market Knowledge: As the company operates from a distance, it may have limited knowledge of local market conditions, customer preferences, and competition.
2. Licensing
Merits:
- Low-Cost Market Entry: Licensing involves granting a foreign company the right to produce and sell the automobile company’s products in exchange for a royalty fee. This reduces the need for significant investment and allows the company to enter the market quickly.
- Local Market Expertise: The licensee, being a local company, will have better knowledge of the market, regulations, and customer preferences, potentially increasing the chances of success.
- Risk Sharing: Licensing spreads the risks associated with entering a new market, as the local partner assumes many of the operational responsibilities.
Limitations:
- Limited Control: The company has less control over the production, marketing, and overall brand image in the foreign market, which may affect product quality and reputation.
- Potential for Future Competition: Licensing agreements may lead to the development of a future competitor if the licensee gains expertise and starts producing similar products independently.
- Income Limitation: The revenue from licensing is usually limited to the royalty fees, and the company might miss out on the full potential of market profits.
These modes offer the company flexibility and lower risk in international expansion, but each comes with its own set of challenges that need to be carefully managed.