Monthly Archives: November 2014

How to enter new markets…Contractual modes of entry

contractual-modes of entry

2014 is shaping up as a pivot point for Australian International Business with Free Trade Agreements now signed for the Big 3 markets in North Asia – Japan, South Korea & China and commitments well underway in Indonesia and now India to conclude agreements.  Following on from the all-important Where to Go? Question as you plan your international business growth strategy is the “How to enter new markets?” Question.  Following on from our How to enter…export blog post we now turn our attention to common contractual modes of market entry and examples highlighting the pros and cons of each entry mode.

intel licensing

1. Licensing

Licensing is the contractual granting of intellectual property rights which could be in the form of technology, patents, or trademarks to brand usage with some common examples from the technology field being Intel or Dolby or in the field of brand trademarks Disney or Barbie. More often than not the licensee will pay a fee for licensing the technology or trade mark which could be a % royalty of sales or a fixed fee for the technology, product or service provision.  Advantages for licensing are the rapid diffusion of technology or brand awareness for relatively low capital investment.  Licensing is a low cost of entry mode and may lead to possible further direct investment with licensees down the line.  A relatively safe and low risk way to test the market before significant capital investment.  Risks include the limited contact with customers who are managed by licensees and reduced ability to control the end products or services delivery.  You are relying on contractual enforcement of controls and in some markets it is difficult to use legal redress with business partners to disagreements upon implementation.  You are also disclosing IP knowledge which can lead to technology transfer and future unwanted competition.  Good examples of this are well documented in technology sector where O.E.M. (Original Equipment Manufacturers) later use their smarts developed from making others equipment to launch their O.B.M. (Own Brand Manufacture) often with additional features and benefits and disrupt the incumbents in their own industry e.g. ASUS laptops from Taiwan.

McDs Franchsing

2. Franchising.

Franchise contractual market entry modes are commonly used in the quick serve restaurant industry globally and notably world renown examples include McDonald’s and Starbucks whilst closer to home Australian build brands like Boost have used Franchise market entry modes successfully to expand internationally.  Another world renowned brand that uses wholesale franchising is the Coca-Cola Company of Atlanta granting franchise rights to global bottlers to manufacture, distribute and market their beverages in overseas territories.  The Franchisor will retain the intellectual property rights to the recipes, formulas, ways of working or operating the businesses and grant the rights to operate and sell their products or services and brand usage rights to the franchisee in exchange for ‘key money’ and quite commonly a % royalty of sales in exchange for systems knowledge, operations manuals, training and development and often shared pooled marketing.  Other examples of franchising in retail might include car dealer networks or petrol retailers who are franchise retail operators for the vehicle manufacturers or fuel manufacturers.

Advantages of the franchising entry model is similar to licensing lower capital outlay upfront and more rapid diffusion of brand and operating footprint leveraging franchisee capital investments.  Controls using franchise agreements over operating procedures, product mix sold and pooled and managed marketing communications of the brand. Risks to manage include finding and managing the master franchise holders and individual franchisees.  Reduced direct customer contact and requirement for sufficient customer service controls and reliance again on contractual modes of enforcement when disagreements arise between franchisor and franchisees.  Lastly there is a profit sharing arrangement with franchisee operators inherent in the agreements as opposed to a wholly owned subsidiary type of operation so whilst upfront capital investment is less it is likely overall long term returns may also be diminished due to profit sharing with local operators.

contract-manufacturingnew

  1. Contract Manufacturing.

Increasingly common and very widespread nowadays for a number of reasons. Contract Manufacturing is a contractual mode of market entry that can give your brand and company local manufacturing cost advantages whilst you still retain marketing, sales and distribution rights and responsibilities for your brand. Advantages of contract manufacturing or sub-contracting include saving in capital expenditure and reduced upfront risk associated vs. a Greenfield manufacturing plant in a foreign country.  You are able to leverage skills and local capability and resourcing of your 3rd party manufacturing party and in some cases you may also be able to leverage their distribution and marketing and sales networks as well.  There is opportunity for two-way technology transfer and learning and of course this is an associated risk to bear in mind with regards to intellectual property around your product composition or manufacturing process.  Examples of contract or sub-contracted manufacturing include the car industry and in particular car parts for later assembly by the auto-manufacturer. It is widely used in the food industry by both retailers and manufacturers and may also be used in home as well as host markets.  In beer for example where freight costs may be a high component to overseas markets and freshness is important you will often find major multinational global brands “Brewed and Manufactured under licence by…” as another example and in many cases they will leverage another brewers distribution, sales and marketing capability with contracts as well.

turnkey

  1. Turnkey Operation

Turnkey Operations are contracts for construction of operating facilities that are transferred to the owner after commissioning for a fee. Most common in large multi-year projects like construction of infrastructure like airports, oil refineries, power plants, roads or railways they are a way for the owners to mitigate risk up front by contracting away the associated management risks of building a major project in a foreign nation.  Advantages include contracting out some of the associated risks of managing a major construction project and the associated reduced management time as its more a case  of fund it, get it build and then take over once it is commissioned.  Risks include the associated technology transfer risks that the sub-contract manufacturer may become a future competitor in your industry with knowledge gained during the build phase.

Mgt Contract

  1. Management Contract

Under a management contract mode of market entry one company provides another company with managerial expertise for a specified period of time. This maybe in exchange for a lump sum payment or a continuing fee on a % of sales value or volume for example. Sectors that commonly use management contracts are utilities services and it may be possible in developing markets where they need assistance from developed markets to manage new infrastructure like water management for example.  Another example might be public council services such as lawn mowing and parks maintainenece and building management services provision which can also be international in scope and nature.  Management contracts maybe useful entry modes where the home party has knowledge and expertise but cannot own the assets off-shore and the other party has a dependence or reason for management expertise.  It can also serve as a useful lower risk learning experience into a foreign territory.  Risks include reliance on the contract for enforcement and remuneration and the possible limited time span.  In addition it may be hard to create and grow any brand equity or awareness in the case of some contract management services.

Contractual modes of entry will inherently rely on trust and relationship building between both parties and important criteria should be considered before you enter into contracts with companies in overseas markets.  Firstly, are you talking to the right partners?  Are they your perfect match?  You also need to bear in mind the rule of law and alternative dispute resolution options in the host country.  Many markets have different legal systems and different levels of respect for contracts as a means of doing business.  Before considering contractual modes of entry our advice is to talk to professional services organisations with experience in this field and others in your industry at home to get a good understanding of the risks and rewards and how to mitigate risks and maximise the success criteria.

Please feel free to add your own comments and experience on contractual modes of market entry below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses grow outside their home base from market entry strategy to route to market to go to market launch. Contact Dermott if your business needs help expanding your business internationally.

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Why are 74% of all new products flopping in Asia Pacific?

ProductFlop

One of the best ways to overcome price pressure is through new products and still almost three quarters of all new products miss their profit targets according to a recent study of 1,600 managers across 40 countries in Asia Pacific (Tacke, et al, 2014).  We all know we need to focus more of our $, people and time on innovation but how much are we spending solely on new products and product performance vs. the other types of innovation?

Our challenge in the Australian Food Industry right now is to think and act more broadly in your innovation effort to truly disrupt your industry and create a sustainable competitive advantage.  Several years ago Doblin Inc. took three thousand things generally agreed to be innovative and compared them mostly to each other and did that with enough cluster analytics to discover 10 distinct types of innovation (Keeley, 2013).

doblin_ten_types_155111

Product Performance innovation address the value, features, and quality of a company’s offering.  This type of innovation involves entirely new products as well as updates and line extensions that add substantial value. It is only one of the Ten Types of Innovation, and it’s often the easiest for competitors to copy.

Often people mistake Product Performance for the sum of innovation. It is certainly important, but it is always worth remembering that it is only one of the Ten Types of Innovation, and it is often the easiest for competitors to copy. Think about any product or feature war you have witnessed—whether torque and toughness in trucks, toothbrushes that are easier to hold and use, even with baby strollers. Too quickly, it all devolves into an expensive mad dash to parity. Product Performance innovations that deliver long-term competitive advantage are the exception rather than the rule.

The far right delivery types of innovation around Channel, Brand and Customer Experience are more important amplifiers of innovation as are Business Model Innovation and Networking (Partnering).  If you can combine 4, 5 or 6 or more specifically chosen ten types of innovation choosing the ones that others ignore in your industry you will get ‘disruptive’ innovation (Keeley, 2013).

How about we spend more time on the other types of innovation and focus some of our attention to the might higher returns from business model innovation?  What is business model innovation?  Most simply “A business model is nothing else than a representation of how an organization makes (or intends to make) money” Peter Drucker.

More specifically in constructing a new business model you will need to answer three distinct questions:

  1. Why would someone want to buy something from you?
  2. How will you make money selling it?
  3. What, exactly, are the important things you need to do to pull off the plan? (Johnson, 2010).

Most importantly in your own organisation you will need to create a common language and definition for business model innovation.  Use of visualisation and pictorial storytelling can help with that business model definition and design.  The Business Model Canvas is one diagrammatic framework tool that has gained a lot of attraction and usage to design, refine and build new business models (Osterwalder & Pigneur, 2010).  There are 9 key elements to constructing a business model canvas and the following short YouTube clip details these very succinctly.

business-model-canvas

There are clearly demonstrated examples in the food industry in Australia, China and globally of companies thinking and acting differently in how they take innovation to market and using business model innovation.  An example close to home here in Australia is www.dishd.com.au

ADRF3083-Dish-d-Chef-s-Specials8-10-14-3

Here a well-established food business saw an opportunity to use technology to disrupt traditional business models and their go to market strategy for new products.  Setting up a small team with key principles of agility & access to leaders the team @dish’ d set about building platforms from which multiple products could be ‘lifted and launched’ sourced from around the world direct to diners doors in Melbourne and Sydney.  Utilising existing partners in logistics the company was able to launch 220 new lines ‘lifted & launched’ in less than 12 months, none of which they had to manufacture themselves, creating a brand new Brand, business, Channel, and customer relationship management model connecting themselves directly with their consumers.  Dish’d saw a gap in the market, trusted their consumer insight and understanding that shoppers were prepared to pay more for good food delivered to their door and went for it with conviction.

SF Best

Further away in China a boom in e-Tailing and e-Commerce has been occurring for some time and a recent example caught my attention.  SF Best launched in June 2014 is another good example of business model innovation.  Selling everything from Chinese organic fresh milk to ice cream and fresh meat and vegetables SF Best from SF Express even delivered cold beer during Soccer World Cup 2014 to thirsty fans doors in 11 cities across China from an App on consumer’s phones.

SF was born in Shunde, Guangdong in 1993.  They are like China’s FedEx and now operate in China, Hong Kong, Macao, Taiwan, US, Japan, Korea, Singapore, Malaysia, Thailand, Vietnam, Australia with 290,000 staff globally. SF Best Fresh Home delivery services launched in June 2014 to 11 cities in China – now number 27!  SF has leveraged their core process competency in logistics into an adjacent industry – eTailing and appears to have hit the ground running!

Last, but not least is a global example of business model innovation from Nestle with their hugely successful Nespresso

nespresso-business-model

Founded in 1986, Nespresso is an autonomous globally managed business of the Nestlé Group, now present in almost 60 countries with more than 9,500 employees worldwide, compared to 331 in 2000 with over 70% of employees in the markets in direct contact with consumers.  50% of new Club Members experience Nespresso for the first time through friends and family.  Nespresso has over 3 million Facebook fans and 180,000 unique customers visit our online boutique every day.  George Clooney, Nespresso brand ambassador since 2005, was chosen by Nespresso Club Members.

George Clooney

Nespresso exemplifies business model innovation from partnering through to customer relationship management and channel innovation with their mail order, call centre, Nespresso.com and Nespresso stores.  All elements of the business model canvas are worked hard and in concert and the business has benefited from 10+ years of 30% Year on Year growth to become a CHF3b business on its own today for Nestle.

Business model innovation is not easy and your thoughts probably turn to ‘how do we start doing this?’  You can start by following some simple tips to design, refine and test your new business models using ‘lean’ teams and start up like activity within your own businesses.

Two Pizzas

Remember the 2 Pizzas Rule: Small Focused Teams who can be fed on no more than 2 pizzas.  Every team should number not more than 7 people as every person in addition to the 7th member of the team is a 10% decline in team productivity to the point where if you have 17 people on the team you have 0% productivity and a team talking to themselves (Jeff Bezos, Amazon.com; Scott Anthony ,2013).

Push to learn in market “Get out of the building!”  Here is a litmus test to gauge the degree to which you are following the approach described. Ask the team the ratio of their time spent preparing materials for management (or conducting desk research to feed into materials for management) versus time spent with customers, developing products, or talking to potential partners. If the ratio is higher than 1:3, you have a problem (Scott Anthony, 2013).

Measure learning, not results.  We are in new territory here exploring new ways of working and doing business, looking for customers, asking them about what problems they have, etc.  You need to be asking your teams “What did you learn? What do you still not know?”  Venture fund the team with sufficient funding to address critical uncertainties.  If they answer those uncertainties fund them to the next gate of decision making but do not automatically fund projects into infinity.  Be prepared to decide and act fast, pivot, lean and learn is your modus operandi.

Lastly make sure the decision makers with the right experience guide the team.  The role of the business leaders is more coach and mentor or venture capitalist as opposed to Go / Kill gatekeepers.  Early team mentoring sessions could be answering and solving problems / opportunity like ‘who is our customer?’ ‘what are their problems that remain unsolved?’ ‘what are their unmet needs’ and ‘who can we partner with to move faster?’

ten-types-of-innovation1

No one said innovation would be easy least of all when you are working on multiple types of innovation all in the same project at the same time.  You need to be doing that to make a real impact in your industry and disrupt your competitors and create sustainable competitive advantage.  We all share the same information on global NPD and research and can ‘copycat’ faster than ever the latest new product. To pull away from the pack you are going to have to work smarter not harder on how you take innovation to market and working with innovation partners to guide you into unchartered waters is one way to help you stay honest to your objectives to think and act differently.  After all if all we continue to do is keep launching new products through the same channels expecting a different result, are we simple insane?  We know 74% of all new products flop so why not invest some of your valuable $, people and time in other types of innovation as well as product performance.

Dermott Dowling is Managing Director @Creatovate, Innovation & International Business consultancy. Creatovate help businesses create innovate and grow through improved idea-to-innovation process. Contact Dermott if your business needs help improving your innovation processes or expanding your business internationally.

References:

Scott Anthony (2013) Five Ways to Innovate Faster http://blogs.hbr.org/2013/07/how-to-innovate-faster/ July 30 retrieved on 14/10/2014

Mark W. Johnson (2010). A New Framework for Business Models January 21, HBR Blogs

Larry Keeley, Bansi Nagji, Helen Walters (2013). Ten Types of Innovation: The Discipline of Building Breakthroughs, John Wiley & Sons.

Larry Keeley (2013) Ten Types of Innovation, YouTube, published 12 July http://youtu.be/vJ5Jq3MyXAk viewed on 14th Oct 2014

Alexander Osterwalder & Yves Pigneur (2010) Business Model Generation John Wiley & Sons, Inc. New Jersey

Alexander Osterwalder (2013) A Better Way to Think About Your Business Model May 6, http://blogs.hbr.org/2013/05/a-better-way-to-think-about-yo/ retrieved on 13.10.14

ALEXANDER OSTERWALDER (2010) COMBINING BUSINESS MODEL PROTOTYPING, CUSTOMER DEVELOPMENT, AND SOCIAL ENTREPRENEURSHIP AUGUST 05, http://businessmodelalchemist.com/blog/2010/08/combining-business-model-prototyping-customer-development-and-social-entrepreneurship.html viewed on 15/10/2014

http://www.nestle.com/csv/case-studies/AllCaseStudies/Ecolaboration-Nespresso-platform-sustainable-innovation viewed on 13th Oct 2014

http://www.nestle-nespresso.com/about-us/facts-and-figures viewed on 13th Oct 2014

George Tacke, Jochen Krauss, Fan Chen & Jan Haemer (2014) http://www.simon-kucher.com/sites/default/files/simon-kucher_global_pricing_study_2014_apac.pdf retrieved on 6th Nov 2014

http://www.sf-express.com/cn/en/news/SF-Best-Creates-the-Ultimate-Cold-Chain-Service-Door-to-Door-Distribution-of-Imported-Cold-Beers-During-FIFA-World-Cup-Brazil/ retrieved on 6th Nov 2014.


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