International Marketing

Prof. Biswarup Ghosh

Module - 2
Lecture - 8
International Business, Entry Modes, and Theories

Good afternoon, welcome back. So, we will continue with the product life cycle.
(Refer Slide Time: 00:20)

So, previously we have explained you the product life cycle in the domestic market. How was
typically the production or how was typically the product life cycle? We have seen in the
domestic market. Or typically, product life cycle in a domestic market, you have seen that the
profit is initially in the; you are starting losing, you are not making any profit, there is a loss
in investment.

And then slowly the product starts and the sales revenue starts, you start making money. And
then the product slowly goes to the next phase in the growth phase, its profit also grows. And
then you reach at the maturity; then the products also with profit also reach at a certain level.
And then you reach decline, the product is no more accepted by your consumers; the product
declines and then the profit also declines.

Then you take out the product from there and introduce a new product. That typically known
as a product life cycle. I hope you understand product life cycle here. Now, the 2 different
product life cycles in 2 different economies; one is the developed economy, another is a less
advanced country. So, how we will show you in the less advanced country. See, the quantity
is in the y-axis and the size of the; if you look at the production, if you look at the with the
time, the production increases and then there is a consumption and the imports.

So, see the difference here. Initially, the production increases and the difference; these two, if
you look at here, the difference is the imports, the consumption and the production, there is a
difference. Initially there is a difference which is basically the exports; and then in the last
you see the difference, slowly the production is going down and then the consumption is
steadily increasing; then it increases the import.

See, it is in a developed nation, like in United States. See this whole thing, the illustration in
less advanced countries. See how that a new product has been launched. So, in the new
product has been launched, the consumption slowly increases; you see how the, in the blue
curve, they slowly increases in that; and then the mixing of the product stages and then the
production also increases.

And then at a certain point, you see that the consumption and the production, you find there is
a difference there and that is basically the exports. When there is a standardized product, the
production increases and then you, then the company starts export that product once you
standardize that product. You see the gap there as an export. So, red line is basically the
production line and the green line is a consumption line.

In that same one, in the red line was typically the production line and the blue line is the
consumption line in United States. So, this is illustrated from Eun and Resnick's International
Financial Management book. This has been taken and to explain to you, in international in
developed economy, typically the product life cycle looks like that, and in a less advanced
country, product life cycle looks like this.
(Refer Slide Time: 03:59)
Then comes, now comes a pure marketing, international marketing strategy or international
marketing, how we enter to various markets. So, there are certain theories which are very
essential for you to understand. So, you have understood that international financial theories
where the absolute advantage and all those and comparative advantage, you have learnt. And
these theories are international marketing theories where using these theories you can take a
decision which theory; there are several options for you and you can, based on this theory,
you can take a decision to enter a market.

So, the theory, first one is a Uppsala theory. So, the Uppsala theory, Uppsala is the group of
scientists; they are from the Sweden. They came out with this theory known as an Uppsala
theory. So, what that Uppsala theory says? Uppsala theory says, initially firms operates in the
domestic market. So, first the theory says that you first initially operate in the domestic
market, build your market share there, grow the business there, then the later operations start
to the overseas market, which are closely connected in terms of culture, religion and
geography.

So, understand the fundamentally. The theory says, do start first at the domestic market. So,
that means, you start building a domestic company, the product and the distribution and earn
your brand, earn the market share in that, earn profitability, then you operate to the overseas
market. Now, which overseas market? Uppsala says, theory says that you go to the market
which is closely connected culturally or the religion or geographically to your country.
So, what does it mean to you? For you, if you are a company from India, if you have grown
business, domestic business, sizeable domestic business, you should first go to the similar
culture or the geography like India, Bangladesh, Myanmar, all these, Southeast Asian
countries instead of going to Asia Pacific country or to Japan or to Europe and all those
countries.

So, the theory tells you, venture first to the similar, the countries which has got a lot of
similarity with the culture, religion and the geography. These things are very crucial for you.
So, initially, firms use the traditional modes like export, what I have said, first you try with
the export. So, first what thing as a domestic company should try? Whether a product is
acceptable in the international market or not, try with the exports; see that if that market is
accepting the product or not.

If the market is accepting the product, it has got export, but later moves to more intensified
trade by the entry mode. Then you might go for which I explained in my previous classes
today, that either you build an, give a licensing there or a franchisee there or you start your
own subsidiary there, all those what we discussed. So, objectives to firm that to produce and
abroad in all markets. Uppsala is typically a stage wise, is a movement the theory suggests.
(Refer Slide Time: 07:21)

So, if you look at this, the source, I have mentioned the source of this slide. Here, I have
given the market A, market B, market C, market D and various markets here. And on the
right, on this axis, we have given the no regular export, independent representative, foreign
subsidiary, foreign production subsidiary. So, how you do? You see that in market A, you
start and slowly go in the foreign production of the sales subsidiary.

In this, in the no regular export, in this, that is increasing the geographical diversification. So,
you are increasing the geographical diversification in the market A, B, C. Slowly you are
increasing the geographical dimension. So, slowly you are going from market A to market B,
market B to market C, market C to D and this way, market N. And in this axis, you go from 0,
first initial export, then you go for a representative there, you put an representative there who
will approve, sell your product.

Then you put a foreign sales subsidiary, your own company's subsidiary. Then, also you
finally you produce your product there. So, that is typically the way you increase. Either first
you increase their geographical extensions, and then in this axis you increase from no export
to full-fledged subsidiary. So, this is typically how you increasing the internationalization. I
have picked up this slide from the Forsgren and Johnson's book.

And this is a very interesting slide, and thanks a lot for the allow this source to; thanking
these researchers to prepare a brilliant slide which is very useful for the students to
understand the Uppsala theory. So, this is the how the market countries and how these from
no export or irregular export to build in to a full-fledged foreign subsidiary. So, how you do
that? So, this is typically known as that.
(Refer Slide Time: 09:29)
So, what is the basis of change of aspects and state of internationalization? First is the market
knowledge. So, what is your knowledge about the market? How much you know about the
market is very crucial in international market. Like how much, what is my knowledge about
the market where I am operating, say a Bangladesh market. So, first of all, as I said that the
PESTEL analysis what we have discussed, like the political, economic, social, technological
and legal; all analysis we do and then we know the market.

Who are the competitors there? Which competitors are operating through a distributor? What
competitors having their own manufacturing in that country? Which competitor is only
importing, exporting in that country? All that market intelligence and how the consumers
have accepted the market, the products? And what is typically the distribution? Is it a direct
distributor or is it a direct sales people? So, how it is there?

So, knowledge of the market is very important for you. So, you see that in the domestic
market, India being such a large country, a marketeer needs a huge knowledge, because these
knowledge of the size and the dimensions, everything of a West Bengal market will be totally
different than the market in Andhra Pradesh or market in Telangana or market in Karnataka.
So, you should have in-depth knowledge about these markets before you start marketing your
products to these geographies.

Similarly, in international market, you should have all sort of information, what you used to
have in your domestic market for various states, you should have similar for various markets
in that region. So, it is a very complex one. You can understand that within the country with a
such varied culture, with a such very large geographical region, with a varied per capita
income in the various states, we see so many different challenges; you have various
challenges to market a product in the domestic market.

Now imagine you are going at the same time to 5 different markets, same. And then, each of
these market, we should have the market knowledge what we have. Then, after you have the
market knowledge, then you will look at the, your commitment decision; how much, what is
your commitment? So, how much you want to go into that market? So, then you put all the
markets there, market A, market B, market C, market D, and then you would say that in
market A and B, I will go only with exports.
Market C, I will go with a distributor network. Market D, I will go with a sales subsidiary.
So, this is the commitment decision you make based on the analysis of the market knowledge
what you make. Then you come to the current activities. What is the current activity right
now? And then you modify the current activity, then you make a market commitment that
okay, I am committed to build this market based on the exports or based on the dealer
network, distributor network or based on the sales subsidiary, building a sales subsidiary or I
will only allow licensing or I will go for franchising or I might go only for the direct
production there or maybe a joint venture.

So, depending on that, your commitment you have to decide. So, that is a very important
slide. And I have referred the source here and this is beautifully presented in the slide that
how this commitment, the aspects and state of internationalisation.
(Refer Slide Time: 13:24)

So, the establishment chain is first, as I explained, told you, first one is the ad hoc exporting,
then you build the agents there, next step; then you build your own sales organization and
then you build your manufacturing in the foreign market. So, that is typically an
establishment chain. You do not go typically first to the manufacturing in the foreign market.
Yes, there are couple of companies, like if you look at the Kia Motors, the example of Kia
Motors coming to India, they first started manufacturing here in this country in 2000 and then
started selling the product during 2020.

I believe they started in 2018 manufacturing their plants and all those. They started marketing
the products in 2020 onwards and became; so, they followed one of the extreme the principal
here, manufacturing in the foreign market. So, they came here to manufacture the car instead
of selling the car in this market through a dealer or a distributor. Now look at this situation
here; very high end products, say Porsche car or Lamborghini car.

There is a few market, the size of the market for this type of very luxury products, very high
cost products are very insignificant size of the market here. So, it is not really worth for the
manufacturer like Porsche to manufacture the car here in India or the Lamborghini to
manufacture the car here in India, because the volumes are not there. So, what they do? They
have their, either the agents or the own sales organisation to sell the cars here instead of
manufacturing.

So, that is one way of entering the market. So, when the demand is not sufficient, they do not
really make an investment. So, I will give you a little bit of more heads up on the Porsche car.
So, the car is a very high end sports car which is typically used by the, in the luxury segment
by the very wealthy people. So, this car is manufactured only in one city in Germany, that is
manufactured in Germany, and that car is produced based on the customized.

So, that means, the car, if I am buying a car of Porsche, I will put what should be the colour
of the car, then the various accessories of the car and then the various, the stitching of the
seats, seat covers and then the various instrument clusters, everything and then the various
modes of driving; all those things can be customizable. So, there are 20 different things you
can or 30 different things or accessories or 40 different things you can customize.

Now imagine an US customers or an Indian customer wants to buy Porsche. They have so
much of customizable option. More customizable option means for you is that you have, you
are landing up into the building more time in manufacturing and building more inventory. So,
if you have a very customized approach, you will not really prefer to go and manufacture in
these US, India and all these countries; instead of that, you continue to manufacture in
Germany, and then you ship it from there either to US to India, based on the customer
specification given to you.

That is the way how Porsche deals. So, Porsche might have their own sales organization in
US who runs through a distribution, car distributors, who sells the car and helps the
customers to procure the car. So, there is an organization there, but there is no manufacturing.
But on the other hand, you look at the Kia cars; they came to India and they started
manufacturing and then marketing the car here in India.

So, how contrast between the Porsche and Kia Motors. Kia Motors started manufacturing
from day 1 here and but here the Porsche is having a sales organization maybe in India; I do
not know exactly whether they have a Porsche, but I am assuming they have a Porsche sales
organization here or maybe agents or dealers here in India to sell that. So, typically, the slide
gives you an idea that you may have only the ad hoc exporting or the agents; these are the
step by step.

If you see how this slide has been prepared, so, these steps are ladder steps and you increase
and then finally go into the manufacturing. So, that is the last stage where you go into that
establishment chain. So, this is typically how, when see the sales starts growing, you move
from ad hoc exporting, then to that agents, then to the own sales organization and then finally
the foreign manufacturing.

Some company might go straight for the foreign manufacturing, some company might go up
to an own sales organization, some company instead of joint manufacturing, some company
may have the joint ventures there instead of a direct manufacturing. I have explained to you
about these joint ventures couple of minutes ago. So, that is one establishment channel.
(Refer Slide Time: 18:58)

Then comes the transaction cost theory. So, the transaction cost theory predicts when
transactions will occur in a market or in organizations. Hence, when new organizations are
likely. So, this is the reference; I have given Williamson's, 91. The reference is given here;
that is International Encyclopedia of the Social Behavioral Sciences. I have given the
reference and also the reference too.

The 2 type of transaction: transactions to support dealing between the buyers and sellers and
transaction to support coordinate within the firm. So, what is transaction cost theory? The
first one we learnt that the Uppsala theory we learnt. So, Uppsala says that you first go to
your similar culture or the nearing geographies and then slowly expand to the other
geographies which is far away from your or different culture.

So, it goes step by step approach is typically Uppsala's approach. Then you first initially start
with exporting, then you start with agent, then we start with your own subsidiary, sales
subsidiary, then you start your manufacturing; that is a step by step. Transaction cost theory is
little different.
(Refer Slide Time: 20:12)

Williamson is a noble, respected Nobel Prize winner of the transaction cost theory; says that
transactions are broadly the transfer of goods or services across the interface. I will explain to
you. He suggests that the internationalization of the transaction within the hierarchy of the
transaction costs are high. In contrast, buying a goods or service on the market was the
preferred option while the transaction cost was minimal.

So, 3 dimensions of the; I will give you in a diagram, I will use one of the diagram to explain
to you the transaction cost theory so that you understand much better. There are 3 dimensions
of transactions; one is the frequency, how frequently you buy; then asset specificity or the
degree to which transaction specification expenses are incurred; uncertainty. The principles of
constraint rationality and opportunism underpin the transaction cost theory.
(Refer Slide Time: 21:17)

So, here comes 4 different types of transaction cost. So, what are these costs? Search costs:
So, search cost means what? I am searching for the dealers, I am searching the distributors
and dealers in that country. So, there is a huge cost there. Why? Because you have to go to
that foreign market for 10 times, meet the various dealers there and then meet the various
distributors; some of the distributors may be working for your competitors, some of the
distributors may start to open a new business and some of these distributor may start talking
with you.

So, there are enormous number of times a business manager or an international marketing
manager has to travel. So, this is one of the transaction cost. So, we have to identify there are
various costs and how these costs are very important and then how you analyze whether it is
the right time for us to move from distributor model to a direct model; transaction cost theory
will give you an idea on that. So, how is that?

So, one of the cost is a search cost is very crucial, which is search cost. Then is a contracting
cost. How many times you have to go there and then legally you have to have a contract with
that company, the legal; you may have 1 distributor; you may have a large country like US,
you might put say 20 distributors; or large country like India, you might put 5 distributors, 4
regional distributors, 1 national distributor; a country like Singapore, you might put 1
distributor; in Malaysia you might put 3 distributors in Malaysia.

So, it all depends on the country. So, you see from here, the search cost is based on the
geography, based on the size of the market; search cost for the distributor is very high.
Contracting cost, because you have to have a legal contract with each of these distributors,
you should have a legal contract with them. Then the monitoring cost. You need to monitor
all these distributors.

That means, they are working for you, they are doing the, they are meeting their customer
requirement, they are doing or following all the ethical practices in the business; all those
things you have to monitor. They are delivering the product in right time to the customer,
there is no delay in delivering the product, there is no delay in installation of the product,
there is no delay in servicing the product.

If there is a breakdown of the equipment, your dealer or a distributor is going and providing
the service. So, this monitoring cost is also enormous cost, because you have to put your own
company's people at the foreign country, who will be there and their salary, their cost of
staying, everything has to be borne by the company; so, monitoring cost is also very high.
Imagine if you have 5 different countries and then you have 2 managers, they have travelled
to 5 different countries and then monitoring is also very important. Then the adoption cost,
how fast this whole thing is adopted and then the cost of this adoption is also very important
here.
(Refer Slide Time: 24:36)
So, this is the principles of a transaction cost model. And this, I have taken this diagram is
very widely used; I am also used for the students. This is very useful diagram and I am
personally thankful to the researchers who had made this diagram which is very useful for the
students. This researcher says Country A and Country B and there is a customer. Look at this
situation here.

The country A is a producer; that means, say a country A. And Country B is an export or then
maybe a buyer and where is an intermediary in the country B. And there is another one, is the
end customer; the last is the end customer. So, there is always a friction, there is a first thing,
there is always a friction between the seller and the buyer. Why there is a friction in the seller
and the buyer?

Because the seller will always want to make it as much as gross margin or the profit possible
and the intermediary will try to make, their objective is to make, they make more money and
they buy at a less discounted price from you. So, there is always a friction; as you know, the
frictions generate heat, it generates amount of heat here. What happens? The distributors will
continuously or there will continuously negotiate with you and continuously try to reduce the
price; there is always a friction between these two.

And then finally, there is an end customer who finally buys it from the distributor. So, what is
the transaction cost? The cost of searching cost and the contracting cost. So, what is the pre
ante cost? Typically, the search cost and the contracting cost. And post cost is the monitoring
cost and enforcement cost. So, there are 2 cost elements there. So, I will come back much
more little bit much more detail in the next slide.

In my next presentation, I will come back to explain you the difference; when you understand
and take the benefit of this transaction cost theory, then you can take a decision whether it is a
time for you to move for the direct operation or to build up your sales subsidiary. Right.
Thank you. Thank you very much.