Getting Goods onto the Market: Marketing Arrangements - Assignment Example

QUESTION Marketing Arrangements The major possible marketing arrangements available to a company willing to get its product to a foreign market are discussed below. These are fundamentally the various international market entry modes that can be opted by a company depending upon its situation and strategy. Licensing Licensing refers to a contractual arrangement between two parties where one firm allows another firm to use its property against the payment of a royalty for a specified time period (Czinkota et al, 1992). Thus, with licensing, a firm can enter a foreign market by giving another firm the right to produce or sell its product. Under licensing, the licensor does not have to forego the ownership of the property (the brand name etc); hence its usefulness lies in a situation where the owner is not willing to lose his ownership. Also, the responsibilities of marketing, investing and manufacturing rests on the firm receiving the license. Franchising Franchising is another form of contractual arrangement between parties concerning the use of a firm’s brand name, logo, trademark etc. In case of franchise, the owner firm (franchiser) backs up the firm acquiring rights (franchisee) in all the standardised marketing and management activities against the payment of some royalty for permanent time period (Roof, 1994). Exporting Exporting is of three kinds, viz. direct, indirect and own. Direct exporting connotes a firm or a manufacturer reaches the market and sells its product with the help of an intermediaries or middlemen. On the contrary, indirect exporting implies a firm selling its products and maintaining direct relationship with the customers in the foreign markets. Own exporting refers to a firm that reaches its customer internationally without any involvement of middlemen in the trade. All the three exporting methods do not imply any sort of ownership and manufacturing in the international market (Czinkota et al, 1992). The success of exporting largely depends upon availability of proper distribution channels in the foreign market. Agency And Distribution Agency and distribution both are necessary elements in conducting export trade. An exporter can opt for any one of the agent or distributor to sell its products in a foreign market. Agent will not be financially involved in the purchase of the product; he will just get the product form the firm and sell it to the customers. Distributors on the other hand, first purchase the product from exporter and then sell it to the customers. Commercial Factors Affecting The Choice Of Marketing Arrangement The commercial factors that are likely to influence a firm’s choice concerning the marketing arrangement to enter in a foreign market constitute a wide variety of factors. Some of these factors are being discussed below. Location Of The Target Market The location of target market is always reckoned in order to choose the most viable option for the marketing arrangement in a foreign country. If the distance between the foreign and local market is feared to involve greater risks and transportation and distribution costs, the firms will more likely go for licensing and franchising rather than exporting. Transportation and distribution increase the cost of the marketing arrangement having an implication on the profit margin of the company. International Experience Of The Firm A firm’s experience of working internationally causes a great influence in decision-making (King and Tucci, 2002). For instance, if a certain past experience of the firm suggests suitability or unsuitability of a specific method, it will certainly be inclined to adopt it every time. But getting products in the foreign market for a first time needs specific considerations. Luostarinen and Welch (1990) suggest that at the instance of entering an international market for the first time rapidly, exporting is a suitable option. However, if the firm has no previous experience of trading internationally or has a lack of people having a profound knowledge of the targeted foreign market, exporting can be lethal (Hitt et al, 2003). In such a case licensing and franchising are better options. Availability Of Foreign Or Domestic Middlemen Middlemen or intermediaries are essentially required when a firm is planning to reach a foreign market for the first time. The availability and non-availability of skilled middlemen in a country also influence the decision of a firm. In case if these are available, the firm can easily opt for exporting, agency, distribution, licensing and franchising. Luostarinen and Welch (1990) illuminate that own exporting arrangement is more suitable for firms not having any intermediaries or middlemen available for trade in the market. Willingness To Invest The willingness of a firm to invest funds or save costs in getting its products to the desired foreign market is another causal factor. Licensing will be the best option if the firm is willing to reach a foreign market at the lowest possible cost (Hitt et al, 2003). Exporting also requires less investment, but might involve high transportation and distribution cost making it an expensive deal. In franchising, although the firm will receive royalty, but will have to bear the costs of standardising the marketing and management activities. Size Of The Market Size of the target market also plays a very important role in determining the marketing arrangement decision of a firm. For instance, in case of a small customer market in the foreign country, options such as exporting and licensing are much viable (Root, 1994). Exporting can take a form of agency or distribution depending upon the nature of risk in the market, while licensing is the most suitable option for a smaller size of market involving lesser investment and correspondingly lesser risk. Market Structure And Distribution Facilities Market structure is another determinant of selecting a method to enter a foreign market. In a market structure where competition is tough, firms are very likely to choose less risky arrangements such as licensing, where the investment and marketing responsibility rests on the licensee. Additionally, this option is also suitable if the market structure in a foreign market bears less potential for skilled agents and adequate distribution facilities (Root, 1994). Country Policies Concerning Export Trade This is one of the preponderant factors in considering various marketing arrangement options. Exporting becomes less lucrative for manufacturers entering a foreign market, where the country policies concerning tariffs, quotas and other trade barriers are restrictive. On the contrary, if the foreign country’s trade policies are favourable, the firm is more likely to end up opting for exporting (Root, 1994). Level Of Product Differentiation The decision for marketing arrangement also depends upon the level of product differentiation with regard to the competitors already extant in the market. If the firm is offering a product that is highly differentiable and competitive in the foreign market, the firm will consider exporting as the best option to get the products to the market. However, in case of low product differentiation and competitiveness, the firm will consider licensing, franchising or agency contracts as highly suitable, as it will be risky to opt for exporting (Root, 1994). Question 2: Commercial Position Of Allenby Ltd— Information Requirements The information supplied by the manufacturer willing to sell its product in a foreign market viz. Hungary is very limited. It lacks major aspects of the company’s commercial position that are crucial in the course of making a decision concerning the company’s marketing arrangement. After an analysis of the information provided by the company, the following aspects seem to have been missed and thus, would be required for an enhanced evaluation of suitable marketing arrangements: Product Information First of all, the most important information missing is concerning the product specifics of the company. In order to make a better decision, the product that the company is willing to offer should be known so as to determine the demand for the product, sales anticipation, and most importantly its ability to compete with the existing product in the foreign market. In this way, it can be decided whether or not the company should opt for exporting (agency or distribution), licensing, franchising etc. Target Market Structure And Size Information The target market of the company is Hungary, but no information is provided concerning the market structure with regard to existing intensity of competition and availability of infrastructure necessary for the marketing of that particular product. Secondly, the market size information is also required to facilitate the evaluation and decision-making process. Noticeably, the information concerning market structure and market size depends largely on the product type. Investment Capacity Of The Company An estimation of investment ability of the firm goes a long way in choosing the right marketing arrangement for it. Here, the information is not provided concerning the company’s investment potential and its capacity to pour in funds for entry modes, as costs and returns are different for different marketing arrangements. For instance, in exporting the transportation and distribution costs are high with maximum potential returns, while in licensing the costs are minimum and same are the returns. All it depends upon the investment capacity of the firm. Assets Of The Company The availability of useful assets to the company (such as successful brand name, recognisable trademark and development in technology etc) can lead it to generate returns through licensing and more prominently franchising. The company has not provided this information restricting the nature of analysis to the available information. This kind of information is also needed of Allenby Ltd, so as to evaluate in a more effective manner as to whether or not the company suitable for franchising. The Plausible Marketing Arrangements On The Available Information The most reasonable marketing arrangements for Allenby Ltd while considering only the available information would be licensing and franchising. The most important reasons for this decision are: The company and its personnel do not have any prior international experience. The company is even not aware of the nature of the local business it was trying to develop relationship with, hence in such a situation, going for exporting either with agency or distributorship will end up in failure due to ignorance. Information like company’s investment capacity and market size are not provided, hence licensing happens to be safest method for all, specifically smaller businesses. It costs least if it is to be taken up, plus it does not involve any risks of losing ownership or disgorge funds on licensee’s marketing and management activities. Franchising is only feasible if the company has any valuable assets such as a recognisable brand name or technology etc. If so, franchising is also a reasonable option. QUESTION 3: Impact Of EC LAW On The Choice Of Marketing Arrangements The laws enacted by European Commission concerning trade and agreements between parties can have an impact upon the choice of marketing arrangement options. For instance, the methods such as licensing and franchising are based on agreements and thus “Article 81of the EC Treaty” can have an impact upon the foreign trade between the two countries. Article 81(1) of the EC Treaty is the Competition Act that disallows the effectuation of any agreements, “which have as their object or effect the prevention, restriction or distortion of competition within the common market” (OFT Publishes Revised Competition Law Guidelines, 2004). However, agreements that do not concern or come under this objective, and purely undertake production and distribution of goods are not affected by this law. Another law impacting upon the selection of any possible marketing arrangements is known as the “Directive 86/653/EEC” as Commercial Agency Act enacted on February 2001, defining the nature and role of “commercial agents”. The Commercial Agency Act states that any one qualifying as a commercial agent is to comply with Hungarian law with respect to commercial agency mentioning that an agent bringing a new customer to the principal is entitled to compensation from his principal who consistently garners commercial advantage out of the new customer brought in by the agent. Hence, every company needs to abide by these laws operating within the jurisdiction of European Commission and Allenby Ltd. Should also consider these laws while taking a decision concerning a particular marketing arrangement option. References Czinkota, M. R., Rivoli, P., Ronkainen, I. A., (1992), “International Business”, The Dryden Press: Chicago, IL Doing Business In Hungary (2004), Ernst & Young, Budapest, 62 Hitt, M. A., Ireland, R. D., Hoskisson, R. E., (2003). “Strategic Management: Competitiveness and Globalization”, South-Western: Cincinnati, OH King, A., Tucci, C. L. (2002), “Incumbent Entry into New Market Niches: The Role of Experience and Managerial Choice in the Creation of Dynamic Capabilities”, Management Science, Vol. 48, No. 2, pp. 171 - 186. Luostarinen, R., Welch, L., (1990). International Business Operations, Kyriiri Oy: Helsinki OFT Publishes Revised Competition Law Guidelines, (2004), Office Of Fair Trading, 21 December, Press Releases, accessed July 14, 2006 Root, F. R. (1994), Entry strategies for international markets, Lexington books: New York Read More