Question

.Explain whether the following statement is true or false and state the correct answer explaination:
1. Profit growth can be defined as the rate of return the firm makes on its invested capital

2. A joint venture is one firm licenses its intellectual property to another firm

3. Write different ways to enter a foreign market. If you were asked by a pharmaceutical company to design a market entry strategy, clearly showing which you would use and justify your choice indicating why the method(s) chosen would give benefits to the company ?

Answer 1

1. False - Profit growth refers to the growth in the profit of a company when compared to a previous period. when we say that profit has increased in the Current year as compared to previous year, we mean to say that profit has grown, or there has been a growth in profit.

Profit growth can be compared monthly, quarterly, yearly, semi-annually, bi-annually etc. Profit growth is measured in percentage(%). For Example, in 2019, Co. A made a profit of 2 million, and in 2020, it made a profit of 3 million, so we can say that profit has grown by 1 million (3 million - 2 million), and hence the profit growth will be 1 million/ 2 million x 100% = 50%. Thus we can say that profit growth has been 50%.

2. False - Joint Venture(JV) refers to when 2 businesses/ companies come together by pooling or gathering all their resources that they have, in order to start a new business activity. Under JV, both the co. collaborate and produce a third entity that is a seperate legal entity. In JVs, it can happen that one Co. brings in its manufacturing competencies, and the other co. brings in its technology and they come together to benefit from each other's expertise. Example - Starbucks did a Joint Venture with TATA group to enter the Indian Market.

3. The following are the different types of ways to enter a foreign market :

A. Licensing - Licensing refers to the process in which a foreign firm provides the license to a local firm with strong local market presence to manufacture and sell its products in the local market. The local firm then sells the licensed product under the foreign firm's brand name. Eg., when Nike provides a license to a local shoe manufacturer to manufacture and distrubite Nike Shoes in Indian Market.

B. Franchising - Franchising refers to a business that allows a local firm to purchase its franchise to replicate its business model for a royalty fee paid to the franchisor. The foreign firm provides with all the resources and set up, but the cost is borne by franchisee, and a royalty fee is paid to the foreign firm. For example, McDonald Franchises all over the world.

C. Joint Ventures - As discussed above, JVs refer to a kind of partnership with a local firm where both firms put together their resources, expertise, technical know-how and manpower to take up a seperate business activity in the local market. Eg., Starbucks JV with TATA group to enter the Indian Market.

D. Turnkey Projects - Turnkey projects are such projects in which a local firm that provides the service of construction, engireering etc. to a foreign client to set up a plant or a building in the foreign market and when the plant is fully set up, the ownership is then transferred to the foreign cleint. Turn the key and the plant becomes up and running.

E. Export - This is the most popular form of entry, in which a foreign firm exports it products to a local market by choosing a local distributor and agent and by applying the right marketing tsrategy, expand their presence in the local market.

Since, Pharmaceuticals can be copied by a local manufacturer easily, a licensing agreement will be the most suitable option for the Co. Under Licensing agreement, the licensor Co.(foreign firm) has great control over the licensee(local firm) and hence copying of the products will not be a risk. Here as the benefits of choosing Licensing agreement as an entry strategy -

i. Cost saving - the licensor(foreign) firm is able save a lot of cost when they set up a licensing agreement with the local Pharma Co. They wil not have to set up their manufacturing plant in the local market.

ii. Minimizing Risk - A licensing agreement provides the foreign firm to minimize financial risks and operational risks because it does not have to bear a setup cost of the manufacturing unit and doesn't have to worry if the product fails in the new market and also, as they don't have to setup the manufacturing plant, their operational risk is very low.

iii. Counterfeit - Under licensing agreement, the risk of copying or counterfeit of the foreign firms products is very minimal as the product can only be produced by the licensee firm under the agreement.

iv. Social/ Cultural gains - The foreign Pharma firm is on an added advantage as it doesn't have to research about the local market and its culture, as the licensing firm already has the knowledge about their market well in advance and thus the foriegn firm can serve the markets by this way, it otherwise would not be able to tap.

v. Ownership of the products - the ownership of the product remains with the foreign firm only, that means there is a very less risk of patent/copyright infringement as the onwer of the Intellectual property is the foreign Pharma Co.

Hope it helps

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