Foreign Market entry strategies, LPG model
There are many ways in which a Company can find a route to an overseas market. There is no single market entry that works for all International markets. For many businesses direct exporting may be the best strategy while in another it may be suitable to set up a joint venture and in another it may be effective to license the manufacturing. Many factors will determine the choice of strategy, including, but not limited to, tariff rates, the degree to which you need to adapt your product, marketing and transportation costs. These factors may well increase cost to market but it would be expected that the increase in sales will offset these costs.
The following Market entry strategies can be regarded as the main options for companies:
The most common form of exporting, it’s selling directly into the chosen market using your own resources initially. Many companies once they have established a sales programme turn to agents and/or distributors to represent them in that market. Distributors and Agents work closely with the company in representing the company’s interests and it’s critical that much time is spent in deciding the choice of agent / distributor. A good distributor / agent could transform chances of success in a chosen market and vice versa.
Acquisition of an Overseas Company
For some companies operating who want to enter a market the purchase of an existing business may be the most appropriate strategy. This may be because the company has large market share, may be a direct competitor or due to government regulation this is the only option for the company to enter the market. It will be certainly costly to acquire a business and determining the value of a company in a foreign market will require competent financial due diligence. The up-side is this market entry strategy will instantly provide the company with the standing of being a local company and will receive all the benefits of local knowledge, an established customer base and be treated by the local government as a local business.
Licensing is quite a sophisticated arrangement where a firm transfers the rights to the use of a product or service to another company. It’s a particularly beneficial if the purchaser of the license has a large share in the market that the company wants to enter. Licensing can be both for marketing or production.
Very common in North America it’s a process for rapid market expansion but it can be seen to be expanding globally. Franchising works particularly well for companies that have a good brand that has repeatable business. For example, food outlets which can be easily relocated into other markets. Two points of importance are required when considering using the franchise strategy. First, is that your business model should be unique or have a strong brand that can be leveraged internationally. The second is that you may run the risk of creating your future competition in your franchisee.
Joint Ventures are a particular form of partnership that involves creating a third independently managed company. Two companies agree to work together in a particular market, either geographic or product and create a third company to action this. Risks and profits are normally shared equally. Some good examples of a successful joint ventures are Sony/Ericsson the mobile phone company, Jaguar Land Rover sealed a joint venture with Chinese company Chery Automobile marking £1.1bn of investment into China.
Partnering can be almost a necessity when companies enter certain foreign markets, for example Asia. Partnering can be a simple co-marketing arrangement or a sophisticated strategic alliance for manufacturing. Partnering can work well in those markets where the culture, both business and social is vastly different that the company’s home market. The local partners will bring local market knowledge, contacts and even potential customers.
Turnkey projects are normally associated to companies that provide services such as environmental consulting, architecture, construction and engineering. A turnkey project is where the facility is built from scratch and turned over to the customer and ready to go – turn the key and the factory is operational. This can be a good way to enter foreign markets as the customer is normally a government and often the project is being financed by an international financial agency such as the World Bank so the risk of not being paid is dramatically reduced.
Piggybacking is a fairly unique method of entering the international marketplace. If a company has a particularly interesting and unique product or service that they sell to large domestic companies who operate on foreign markets, it may be worth approaching them to see if a product or service can be included in their sales portfolio for international markets. This reduces the risk and costs because you are essentially selling domestically and the larger company is marketing your product or service for the company internationally.
Greenfield investments require the greatest involvement in international business. A greenfield investment is where a company purchases the land, builds the facility and operates the business on an ongoing basis in a foreign market. It’s certainly the most costly option and holds the greatest risk but some markets may require companies to undertake the cost and risk due to government regulations, transportation costs and the ability to access technology or skilled labour.
Liberalization, Privatization, Globalization (LPG Model)
The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies’ start working without or with fewer restrictions and government allow private players to expand for the growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
- To increase competition amongst domestic industries.
- To encourage foreign trade with other countries with regulated imports and exports.
- Enhancement of foreign capital and technology.
- To expand global market frontiers of the country.
- To diminish the debt burden of the country.
This is the second of the three policies of LPG. It is the increment of the dominating role of private sector companies and the reduced role of public sector companies. In other words, it is the reduction of ownership of the management of a government-owned enterprise. Government companies can be converted into private companies in two ways:
- By Disinvestment
- By Withdrawal of governmental ownership and management of public sector companies.
Forms of Privatization
- Denationalization or Strategic Sale: When 100% government ownership of productive assets is transferred to the private sector players, the act is called denationalization.
- Partial Privatization or Partial Sale: When private sector owns more than 50% but less than 100% ownership in a previously construed public sector company by transfer of shares, it is called partial privatization. Here the private sector owns the majority of shares. Consequently, the private sector possesses substantial control in the functioning and autonomy of the company.
- Deficit Privatization or Token Privatization: When the government disinvests its share capital to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.
Objectives of Privatization
- Improve the financial situation of the government.
- Reduce the workload of public sector companies.
- Raise funds from disinvestment.
- Increase the efficiency of government organizations.
- Provide better and improved goods and services to the consumer.
- Create healthy competition in the society.
- Encouraging foreign direct investments (FDI) in India.
It means to integrate the economy of one country with the global economy. During Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the last policy of LPG to be implemented.
Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards independence and integration of the world as a whole by setting various strategic policies. Globalization is attempting to create a borderless world, wherein the need of one country can be driven from across the globe and turning into one large economy.
Outsourcing as an Outcome of Globalization
The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a company of a country hires a professional from some other country to get their work done, which was earlier conducted by their internal resource of their own country.
The best part of outsourcing is that the work can be done at a lower rate and from the superior source available anywhere in the world. Services like legal advice, marketing, technical support, etc. As the Information Technology has grown in the past few years, the outsourcing of contractual work from one country to another has grown tremendously. As a mode of communication has widened their reach, all economic activities have expanded globally.
Various Business Process Outsourcing companies or call centres, which have their model of a voice-based business process have developed in India. Activities like accounting and book-keeping services, clinical advice, banking services or even education are been outsourced from developed countries to India.
The most important advantage of outsourcing is that big multi-national corporate or even small enterprises can avail good services at a cheaper rate as compared to their country’s standards. The skill set in India is considered most dynamic and effective across the world. Indian professionals are best at their work. The low wage rate and specialized personnel with high skills have made India the most favourable destination for global outsourcing in the later stage of reformation.
LPG Model in India
After Independence in 1947 Indian government faced a significant problem to develop the economy and to solve the issues. Considering the difficulties pertaining at that time government decided to follow LPG Model. The Growth Economics conditions of India at that time were not very good. This was because it did not have proper resources for the development, not regarding natural resources but financial and industrial development. At that time India needed the path of economic planning and for that used ‘Five Year Plan’ concept of which was taken from Russia and feet that it will provide a fast development like that of Russia, under the view of the socialistic pattern society. India had practiced some restrictions ever since the introduction of the first industrial policy resolution in 1948.
Liberalization is defined as making economics free to enter the market and establish their venture in the country. Privatization is defined as when the control of economic is sifted from public to a private hand. Globalization is described as the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade.