WEBVTT Kind: captions Language: en 00:00:12.880 --> 00:00:23.840 Good afternoon, welcome back. So, we will continue with the product life cycle.So, previously we 00:00:23.840 --> 00:00:29.520 have explained you the product life cycle in the domestic market. How was typically the 00:00:29.520 --> 00:00:35.040 production or how was the typically the product life cycle? We have seen in the domestic market. 00:00:35.040 --> 00:00:41.200 Or typically, product life cycle in a domestic market, you have seen that the profit is initially 00:00:41.200 --> 00:00:46.720 in the; you are starting losing, you are not making any profit, there is a loss in investment. 00:00:46.720 --> 00:00:50.320 And then slowly the product starts and the sales revenue starts, 00:00:50.320 --> 00:00:55.120 you start making money. And then the product slowly in the goes goes to the next phase in 00:00:55.120 --> 00:01:00.640 the growth phase, its profit also grows. And then you reach at the (matu) maturity; 00:01:00.640 --> 00:01:06.080 then the products also with profit also reach at a hi certain level. And then you reach decline, 00:01:06.080 --> 00:01:11.040 the product is no more accepted by your consumers; the product declines and then 00:01:11.040 --> 00:01:15.200 the profit also declines. Then you take out the product from there and introduce a new product. 00:01:15.200 --> 00:01:19.840 That typically known as a product life cycle. I hope you understand product life cycle here. 00:01:21.280 --> 00:01:28.960 Now, the 2 different product life cycles in 2 different economies; one is the developed economy, 00:01:28.960 --> 00:01:34.640 another is a less advanced country. So, how we will show you in the less advanced country. 00:01:34.640 --> 00:01:40.960 See, the quantity is in the y-axis and the size of the a and the; 00:01:41.520 --> 00:01:48.640 if you look at the production, if you look at the with the time, the production increases and then 00:01:49.680 --> 00:01:55.600 the there is a, there is a de consumption and the imports. So, see the difference here. 00:01:56.320 --> 00:02:04.480 Initially, the production increases and the difference; these two, if you look at here, 00:02:04.480 --> 00:02:12.080 the difference is the imports, the consumption and the production, there is a difference. Initially 00:02:12.080 --> 00:02:17.600 the po there is an difference which is basically the exports; and then in the last you see the 00:02:17.600 --> 00:02:25.360 difference the slowly the production is going down and then the consumption is steadily increasing; 00:02:25.360 --> 00:02:31.520 then it increases the import. See, it is in a developed nation, okay, like in United States. 00:02:32.320 --> 00:02:37.760 See this whole thing, the illustration in an less advanced countries. 00:02:37.760 --> 00:02:43.440 See how that a new product has been launched. So, in the new product has been launched, the 00:02:43.440 --> 00:02:50.960 consumption slowly increases; you see the how the, in the blue curve, they slowly increases in that; 00:02:50.960 --> 00:02:58.640 and then the mixing of the product stages and then the production also increases. 00:02:58.640 --> 00:03:04.000 And then at at a certain point, you see that the consumption and the production, 00:03:04.000 --> 00:03:08.160 you find there is a difference there and that is basically the exports. 00:03:08.160 --> 00:03:12.160 Those, when there is a standardized product, the production increases 00:03:12.160 --> 00:03:18.080 and then you you, then the company starts export that product once you standardize that product. 00:03:18.080 --> 00:03:23.760 You see the gap there as an export. So, red line is basically the production line 00:03:23.760 --> 00:03:30.240 and the green line is a consumption line. Clear? In a in that same one, in the red line was 00:03:30.240 --> 00:03:36.480 typically the production line and the blue line is the consumption line in United States. Clear? 00:03:36.480 --> 00:03:42.880 So, this is illustrated from Eun and Resnick's International Financial Management book. 00:03:42.880 --> 00:03:49.360 This has been uh taken and to explain to you, in international in developed economy, 00:03:49.360 --> 00:03:52.400 typically the product life cycle looks like that, and 00:03:52.400 --> 00:03:57.040 in an less advanced country, product life cycle looks like this. Okay. 00:04:00.480 --> 00:04:07.920 Then comes, now comes a pure marketing, international marketing uh strategy 00:04:07.920 --> 00:04:15.920 or international marketing, how we enter to various markets. So, there are certain theories 00:04:15.920 --> 00:04:20.640 which are very, very essential for you to understand. So, you have understood 00:04:20.640 --> 00:04:26.960 that international financial theories where the absolute advantage and all those and comparative 00:04:26.960 --> 00:04:32.720 advantage, you have uh learnt. And these theories are international marketing theories 00:04:32.720 --> 00:04:40.320 where using these theories you can take an decision which theory; there are several options 00:04:40.320 --> 00:04:45.520 for you and you can, based on this theory, you can take a decision to enter a market. 00:04:45.520 --> 00:04:52.320 So, the theory, first one is a Uppsala theory. So, the Uppsala theory, Uppsala is 00:04:52.320 --> 00:04:59.600 the group of scientists; they are from the Sweden. They have came out with this pe theory known as an 00:04:59.600 --> 00:05:05.040 Uppsala theory. So, what that Uppsala theory says? Uppsala theory says, initially firms operates in 00:05:05.040 --> 00:05:10.000 the domestic market. So, first the theory says that you first initially operate in the domestic 00:05:10.000 --> 00:05:17.760 market, build your market share there, grow the business there, then the later operations start to 00:05:17.760 --> 00:05:23.680 the overseas market, which are closely connected in terms of culture, religion and geography. 00:05:23.680 --> 00:05:26.880 So, understand the fundamentally. The theory says, 00:05:28.320 --> 00:05:34.880 do start first at the domestic market. So, that means, you start building a domestic company, the 00:05:34.880 --> 00:05:41.280 product and the distribution and earn your brand, earn the market share in that, earn profitability, 00:05:41.280 --> 00:05:47.840 then you operate to the overseas market. Now, which overseas market? Uppsala says, theory says 00:05:47.840 --> 00:05:51.840 that you go to the market which is closely connected culturally or the 00:05:51.840 --> 00:05:56.320 religion or geographically to your country. So, the what it, what does it mean to you? 00:05:56.880 --> 00:06:02.000 For you, if you are a company from India, if you have grown business, domestic business, 00:06:02.000 --> 00:06:08.080 sizeable domestic business, you should first go to the similar culture or the geography like 00:06:08.080 --> 00:06:14.080 India, Bangladesh, Myanmar, all these, Southeast Asian countries instead of going to Asia Pacific 00:06:14.080 --> 00:06:20.160 country or to Japan or to Europe and all those countries. So, the theory tells you, venture 00:06:20.160 --> 00:06:26.240 first to the similar, the countries which has got a lot of similarity with the culture, 00:06:26.240 --> 00:06:30.000 religion and the geography. These things are very, very crucial for you. 00:06:30.720 --> 00:06:36.480 So, initially, firms uses the traditional modes like export, what I have said, first 00:06:36.480 --> 00:06:41.120 you try with the export. So, first what thing as a domestic company should try? Whether a product 00:06:41.120 --> 00:06:47.520 is acceptable in the international market or not, try with with the exports; see that if that market 00:06:47.520 --> 00:06:52.640 is accepting the product or not. If the market is accepting the product, it has got export, 00:06:52.640 --> 00:06:58.000 but later moves to more intensified trade by the entry mode. Then you might go for an 00:06:58.000 --> 00:07:05.120 which I explained in my previous classes today, that either you build an, give a licensing there 00:07:05.120 --> 00:07:11.760 or a franchisee there or or you start your own subsidiary there, all those what we discussed. 00:07:11.760 --> 00:07:18.080 So, objectives is to firm that to produce and abroad in all markets. Uppsala is typically a 00:07:18.080 --> 00:07:25.280 stage wise, is a movement the theory suggests.So, if you look at this, the source, I have mentioned 00:07:25.280 --> 00:07:32.800 the source of this slide. Here, I have given the market A, market B, market C, market D and 00:07:32.800 --> 00:07:38.880 various markets here. And on the right, on the this axis, we have given the no regular export, 00:07:38.880 --> 00:07:43.920 independent representative, foreign subsidiary, foreign production subsidiary. So, how you do? 00:07:43.920 --> 00:07:52.080 You see that in market A, you start and slowly go in the foreign production of the sales subsidiary. 00:07:53.120 --> 00:07:59.360 In this, in the no regular export, in this, that is increasing the geographical 00:07:59.360 --> 00:08:04.800 diversification. So, you are increasing the geographical diversification in the market A, 00:08:04.800 --> 00:08:09.040 4, B, C. Slowly you are increasing the geographical dimension. So, 00:08:09.040 --> 00:08:15.200 slowly you are going from market A to market B, market B to market C, market C to D and this way, 00:08:15.200 --> 00:08:22.240 market N. And in this axis, you go from 0, first initial export, then you go for an 00:08:22.240 --> 00:08:26.640 representative there, you put an representative there who will approve, sell your product. 00:08:26.640 --> 00:08:32.320 Then you put a foreign sales subsidiary, your own company's subsidiary. Then, also you finally you 00:08:32.320 --> 00:08:38.800 produce your product there. So, that is typically the way you increase. Either first you increase 00:08:38.800 --> 00:08:46.160 their geographical uh extensions, and then in this axis you increase from no export to full-fledged 00:08:46.160 --> 00:08:51.760 subsidiary. So, this is typically how you increasing the internationalization. I have picked 00:08:51.760 --> 00:08:59.520 up this slide from the Forsgren and Johnson's ma sa book. And this is an very, very interesting 00:08:59.520 --> 00:09:08.800 slide, and thanks a lot and uh for the allow this source to uh; thank thanking uh these researchers 00:09:08.800 --> 00:09:14.880 to prepare an brilliant slide which is very useful for the students to understand the Uppsala theory. 00:09:14.880 --> 00:09:22.560 So, this is the how the market countries and how these from no export or reg i irregular export 00:09:22.560 --> 00:09:27.360 to build in to a full-fledged foreign subsidiary. So, how you do that? So, 00:09:27.360 --> 00:09:36.000 this is typically known as that. Okay. So, so, what is the basis of change of aspects and state 00:09:36.000 --> 00:09:41.840 of internationalization? First is the market knowledge. Okay. So, what is your knowledge about 00:09:41.840 --> 00:09:48.080 the market? How much you know about the market is very, very crucial in international market. 00:09:48.080 --> 00:09:54.800 Like how much, what is my knowledge about the market where I am operating, say a Bangladesh 00:09:54.800 --> 00:10:00.880 market. So, first of all, as I said that the PESTEL analysis what we have discussed, like the 00:10:00.880 --> 00:10:07.680 political, economic, social, technological and legal; all analysis we do and then we know the 00:10:08.560 --> 00:10:13.840 market. Who are the competitors there? Which competitors are operating through a distributor? 00:10:13.840 --> 00:10:17.360 What competitors having their own manufacturing in that 00:10:17.360 --> 00:10:22.720 country? Which competitor is only importing uh exporting in that country? 00:10:22.720 --> 00:10:29.280 All that market intelligence and how the consumers have accepted the market uh the products? And what 00:10:29.280 --> 00:10:35.520 is typically the distribution? Is it a direct distributor or is it a direct sales people? So, 00:10:35.520 --> 00:10:41.440 how it is there? So, knowledge of the market is very, very important for you. Okay. So, you see 00:10:42.000 --> 00:10:46.000 that in the domestic market, India being such a large country, 00:10:46.000 --> 00:10:52.320 a marketeer needs an huge knowledge, because these knowledge of the size and the dimensions, 00:10:52.320 --> 00:10:55.920 everything of an West Bengal market will be totally different than the 00:10:55.920 --> 00:11:00.240 market in Andhra Pradesh or market in Telangana or market in Karnataka. 00:11:00.240 --> 00:11:07.200 So, the you should have in-depth knowledge about these markets before you start uh marketing your 00:11:07.200 --> 00:11:13.040 products to these uh geographies. Similarly, in international market, you should have all 00:11:13.040 --> 00:11:17.200 sort of information, what you used to have in your domestic market for various states, 00:11:17.760 --> 00:11:23.040 you should have similar for various markets in that region. So, it is a very, very complex one. 00:11:23.040 --> 00:11:29.520 You can understand that within the country with a such varied culture, with a such very large 00:11:29.520 --> 00:11:36.640 geographical region, with a varied per capita income in the various states, we see so many 00:11:36.640 --> 00:11:42.960 different challenges; you have various challenges to market a product in the domestic market. 00:11:43.600 --> 00:11:49.280 Now imagine you are going at the same time to 5 different markets, same a. And then, 00:11:49.280 --> 00:11:53.840 each of these market, we should have the market knowledge, okay, what we have. 00:11:54.560 --> 00:12:00.240 Then, after you have the market knowledge, then you will look at the, your commitment decision; 00:12:00.240 --> 00:12:06.080 how much, what is your commitment? Okay. So, how much you want to go into that market? So, 00:12:06.080 --> 00:12:10.800 then you put all the markets there, market A, market B, market C, market D, 00:12:10.800 --> 00:12:17.920 and then you would say that, okay, in market A and B, I will go only with exports. Okay. 00:12:17.920 --> 00:12:26.800 Market C, I will go with a distributor network. Market D, I will go with a sales subsidiary. So, 00:12:26.800 --> 00:12:32.240 this is the mar commitment decision you make based on the analysis of the market knowledge what you 00:12:32.240 --> 00:12:36.960 make. Then you come to the current activities. What is the current activity right now? 00:12:36.960 --> 00:12:43.600 And then you modify the current activity, then you make a market commitment that okay, I am committed 00:12:43.600 --> 00:12:52.240 to build this market based on the exports or based on the dealer network, distributor network or 00:12:52.240 --> 00:12:58.000 based on the sales subsidiary, building a sales subsidiary or I will only allow licensing or I 00:12:58.000 --> 00:13:05.680 will go for franchising or I might go only for the direct production there or maybe a joint venture. 00:13:05.680 --> 00:13:10.960 So, depending on that, your commitment you have to decide. So, that is a very, very important slide. 00:13:11.920 --> 00:13:17.440 And I have referred the source here and this is beautifully presented in the source that the, in 00:13:17.440 --> 00:13:23.840 the slide uh that this, how this commitment, the aspects and state of internationalisation.So, 00:13:27.360 --> 00:13:34.080 the establishment chain is first, as I explained, told you, first one is the ad hoc exporting, 00:13:34.640 --> 00:13:42.000 then you build the agents there, next step; then this, then you build your 00:13:42.000 --> 00:13:47.600 own sales organization and then you build your manufacturing in the foreign market. 00:13:47.600 --> 00:13:54.000 So, that is typically an establishment chain. You do not go typically first to the manufacturing in 00:13:54.000 --> 00:13:59.200 the foreign market. Yes, there are couple of companies, like if you look at the Kia Motors, 00:13:59.200 --> 00:14:05.520 the example of Kia Motors coming to India, they first started manufacturing here in this 00:14:05.520 --> 00:14:11.200 uh country in 2000 and then started selling the product during 2020. I believe they 00:14:11.200 --> 00:14:16.560 started in 2018 manufacturing their plants and all those. They started the product in, 00:14:16.560 --> 00:14:22.720 the marketing the products in 2020 onwards and became; so, they followed one of the 00:14:23.360 --> 00:14:27.680 the the extreme the principal here, manufacturing in the foreign market. 00:14:27.680 --> 00:14:33.360 So, they came here to manufacture the car instead of selling the car 00:14:33.360 --> 00:14:38.240 in this market through a dealer or a distributor. Now look at this situation 00:14:38.240 --> 00:14:46.080 here; very high end products, very high end products, say Porsche car or Lamborghini car. 00:14:46.720 --> 00:14:50.800 There is a few market, the size of the market for this type of very, very 00:14:51.520 --> 00:14:58.000 luxury products, very high cost products are very, very insignificant size of the market here. So, 00:14:58.000 --> 00:15:06.160 it is not really worth for the manufacturer like Porsche to manufacture the car here in India 00:15:06.160 --> 00:15:11.040 or the Lamborghini to manufacture the car here in India, because the volumes are not there. 00:15:11.680 --> 00:15:18.160 So, what they do? They have their, either the agents or the own sales organisation 00:15:18.160 --> 00:15:24.000 to sell the cars here instead of manufacturing. Okay. So, that is one way of entering the market. 00:15:24.000 --> 00:15:28.560 So, the when the demand is not sufficient, they do not really make an investment. So, 00:15:28.560 --> 00:15:32.560 I will give you a uh little bit of more heads up on the Porsche car. 00:15:33.360 --> 00:15:41.680 So, the car is a very high end sports car which is typically used by the, in the luxury segment 00:15:41.680 --> 00:15:49.840 by the very wealthy people. So, this car is manufactured only in one uh city in Germany, 00:15:49.840 --> 00:15:56.880 that is manufactured in Germany, and that car is produced based on the customized. 00:15:56.880 --> 00:16:03.920 So, that means, the car, if I am a buying a car of Porsche, I will put what should be 00:16:03.920 --> 00:16:10.960 the colour of the car, then the the the various accessories of the car and then the various, the 00:16:10.960 --> 00:16:18.000 stitching of the seats, seat covers and then the various instrument clusters, everything and then 00:16:18.560 --> 00:16:24.160 uh the (spa), the various modes of driving; all those things can be customizable. So, there are 00:16:25.040 --> 00:16:29.680 20 different things you can or 30 different things or accessories or 40 different things 00:16:29.680 --> 00:16:37.120 you can customize. Now imagine an US customers or an Indian customer wants to buy Porsche. 00:16:37.120 --> 00:16:42.800 They have so much of customizable option. More customizable option means for you is that 00:16:42.800 --> 00:16:47.920 you have, you are landing up into the building more time in manufacturing and 00:16:47.920 --> 00:16:54.480 building more inventory. Okay. So, it is, so, if you have a very, very customized approach, 00:16:54.480 --> 00:17:01.600 you will not really prefer to go and manufacture in these US, India and all those things, 00:17:01.600 --> 00:17:07.120 all these countries; instead of that, you continue to manufacture in Germany, and then you ship it 00:17:07.120 --> 00:17:12.000 from there either to US to India, based on the customer specification given to you. 00:17:12.000 --> 00:17:17.840 That is the way how Porsche deals. So, Porsche might have their own sales organization in US who 00:17:18.880 --> 00:17:24.240 runs through a distribution, car distributors, who sells the car and and helps the customers to 00:17:24.240 --> 00:17:28.720 procure the car. So, there is an organization there, but there is no manufacturing. Okay. 00:17:28.720 --> 00:17:32.720 But on the other hand, you look at the Kia (manu) Kia (manufac) cars; 00:17:32.720 --> 00:17:36.320 they came to India and they started manufacturing and then 00:17:36.320 --> 00:17:42.000 marketing the car here in India. So, the how contrast between the Porsche and Kia Motors. 00:17:42.000 --> 00:17:50.400 Kia Motors started manufacturing from day 1 here and but here the Porsche is having a sales 00:17:50.400 --> 00:17:54.720 organization maybe in India; I do not know exactly whether they have a Porsche, but I I am assuming 00:17:54.720 --> 00:17:59.280 they have a Porsche sales organization here or maybe an agents or dealers here in India to sell 00:17:59.280 --> 00:18:08.560 that. So, typically, the slide gives you an idea that you may have only the ad hoc ex uh exporting 00:18:08.560 --> 00:18:13.920 or the agents; these are the step by step. If you see the how this slide has been prepared, 00:18:13.920 --> 00:18:20.160 so, these steps are ladder steps and you increase and then finally go into the manufacturing. 00:18:20.160 --> 00:18:26.080 So, that is the last stage where you go into that establishment chain. So, this is typically how, 00:18:26.080 --> 00:18:32.480 when see the sales starts growing, you move from ad hoc exporting, then to that agents, 00:18:32.480 --> 00:18:37.040 then to the own sales organization and then finally the foreign manufacturing. 00:18:37.040 --> 00:18:42.240 Clear? Some company might go straight for the foreign manufacturing, some company might go 00:18:42.240 --> 00:18:48.000 up to an own sales organization, some company instead of joint manufacturing, 00:18:48.000 --> 00:18:52.400 some company may have the joint ventures there instead of a direct manufacturing. 00:18:52.400 --> 00:18:55.520 I have explained to you about these joint ventures couple of minutes ago. 00:18:55.520 --> 00:18:57.680 Okay. So, that is one establishment channel.Then 00:19:00.880 --> 00:19:07.920 comes the transaction cost theory. Okay. So, the transaction cost theory predicts 00:19:07.920 --> 00:19:14.400 when transactions will occur in a market or in organizations. Hence, when new organizations are 00:19:14.400 --> 00:19:19.680 likely. So, this is the reference; I have given Williamson's, 91. The reference is given here; 00:19:20.400 --> 00:19:23.280 that is International Encyclopedia of the Social 00:19:23.280 --> 00:19:27.680 Behavioral Sciences. I have given the reference and also the reference too. 00:19:28.240 --> 00:19:33.440 The 2 type of transaction: transactions to support dealing between the buyers and sellers and 00:19:33.440 --> 00:19:39.040 transaction to support coordinate within the firm. So, what is transaction cost theory? The first one 00:19:39.040 --> 00:19:46.160 we learnt that the Uppsala theory we learnt. So, Uppsala says that you first go to your similar 00:19:46.160 --> 00:19:54.240 culture or the nearing geographies and then slowly expand to the other geographies which is far away 00:19:54.240 --> 00:20:00.000 from your or different culture. So, it goes step by step approach is typically Uppsala's approach. 00:20:00.000 --> 00:20:04.960 Then you first initially start with exporting, then you start with agent, then we start with 00:20:04.960 --> 00:20:09.600 your own subsidiary, sales subsidiary, then you start your manufacturing; that is a step by step. 00:20:10.240 --> 00:20:15.280 Transaction cost theory is little different.Williamson is a noble, 00:20:15.280 --> 00:20:21.120 respected Nobel Prize winner of the transaction cost theory; says that transactions are broadly 00:20:21.120 --> 00:20:26.960 the transfer of goods or services across the interface. I will explain to you. He suggests that 00:20:26.960 --> 00:20:32.960 the internationalization of the transaction within the hierarchy of the transaction costs are high. 00:20:33.520 --> 00:20:38.800 In contrast, buying a goods or service on the market was the preferred option 00:20:38.800 --> 00:20:46.240 while the transaction cost was minimal. So, 3 dimensions of the; I will give you in a diagram, 00:20:46.240 --> 00:20:50.320 I will use one of the diagram to explain to you the transaction cost theory so 00:20:50.320 --> 00:20:55.920 that you understand much better. There are 3 dimensions of a transactions uh; 00:20:56.480 --> 00:21:02.800 one is the frequency, how frequently you buy; then asset specificity or the degree to which 00:21:02.800 --> 00:21:08.800 transportation trans transaction specification expenses expenses are incurred; uncertainty. 00:21:09.440 --> 00:21:14.800 The principles of constraint rationality and opportunism underpin the transaction 00:21:14.800 --> 00:21:23.200 cost theory. Clear? So, here comes 4 different types of transaction cost. So, 00:21:23.200 --> 00:21:28.320 what are these costs? Search costs: So, search cost means what? I am searching for 00:21:29.040 --> 00:21:33.680 the dealers, I am searching the distributors and dealers in that country. Okay. So, 00:21:33.680 --> 00:21:38.320 there is a huge cost there. Why? Because you have to go to that foreign market 00:21:38.880 --> 00:21:45.360 for 10 times, meet the various dealers there and then meet the various distributors; 00:21:45.360 --> 00:21:50.800 some of the distributors may be working for your competitors, some of the distributors may 00:21:50.800 --> 00:21:58.480 may start to open a new business and some of these distributor may start talking with you. 00:21:58.480 --> 00:22:02.960 So, there are enormous number of times a business manager or an international 00:22:02.960 --> 00:22:09.680 marketing manager has to travel. So, this is one of the transaction cost. So, we have to identify 00:22:09.680 --> 00:22:16.160 there are various costs and how these costs are very important and then how you analyze 00:22:16.160 --> 00:22:22.000 whether it is the right time for us to move from distributor model to a direct model; 00:22:22.000 --> 00:22:25.920 transaction cost theory will give you an idea on that. So, how is that? So, 00:22:25.920 --> 00:22:30.960 one of the cost is a search cost, okay, is is very, very crucial, which is search cost. 00:22:32.480 --> 00:22:36.960 Then is a contracting cost. How many times you have to go there 00:22:36.960 --> 00:22:42.560 and then legally you have to have a contract with that company, the legal; you may have 00:22:42.560 --> 00:22:48.720 1 distributor; you may have a large country like uh US, you might put say 20 distributors; 00:22:48.720 --> 00:22:53.440 or large country like India, you might put 5 distributors, 4 regional distributors, 00:22:53.440 --> 00:22:58.720 1 national distributor; a country like Singapore, you might put 1 distributor; you might put, 00:22:58.720 --> 00:23:05.200 in Malaysia you might put 3 distributors in Malaysia. So, it all depends on the country. 00:23:05.760 --> 00:23:10.880 So, you see from here, the search cost is on the based on the geography, 00:23:10.880 --> 00:23:14.880 based on the size of the market; search cost for the distributor is very, very high. 00:23:15.680 --> 00:23:20.720 Contracting cost, because you have to have a legal contract with each of these distributors, 00:23:20.720 --> 00:23:26.640 you should have a legal contract with them. Then the monitoring cost. You need to monitor 00:23:26.640 --> 00:23:33.520 all these distributors, you need to monitor. That means, they are working for you, they are 00:23:33.520 --> 00:23:38.960 doing the, they are meeting their customer requirement, they are doing or following all 00:23:38.960 --> 00:23:43.760 the ethical practices in the business; all those things you have to monitor. 00:23:43.760 --> 00:23:50.000 They are delivering the product in right time to the customer, there is no delay in delivering the 00:23:50.000 --> 00:23:55.680 product, there is no delay in installation of the product, there is no delay in servicing the 00:23:55.680 --> 00:24:01.040 product. If there is a breakdown of the equipment, your dealer or a distributor is going and 00:24:01.040 --> 00:24:06.880 providing the service. So, this monitoring cost is also enormous cost, because you have to put your 00:24:06.880 --> 00:24:13.120 own company's people at the foreign country, who will be there and your their salary, their cost of 00:24:13.120 --> 00:24:18.160 staying, everything has to be borne by the company; so, monitoring cost is also very high. 00:24:18.160 --> 00:24:23.600 Imagine if you have 5 different countries and then you have 2 managers, they have travelled to 00:24:23.600 --> 00:24:29.760 5 different countries and then monitoring is also very, very important. Then the adoption cost, how 00:24:29.760 --> 00:24:35.440 fast this whole thing is adopted and then the cost of this adoption is also very important here.So, 00:24:39.840 --> 00:24:46.960 this is the principles of a transaction cost model. And this, I have taken this diagram is 00:24:46.960 --> 00:24:50.560 very widely used; I am also used for the students. 00:24:50.560 --> 00:24:56.960 This is very, very useful uh diagram and I am personally thankful uh to the researchers 00:24:56.960 --> 00:25:01.120 who had made this diagram which is very useful for the students. 00:25:01.680 --> 00:25:09.280 This researcher says Country A and Country B and there is a customer. Look at this 00:25:09.280 --> 00:25:16.000 situation here. The country A is a producer; that means, say a country A. And Country B 00:25:16.000 --> 00:25:21.680 is an export or then maybe an buyer and where is an intermediary in the country B. 00:25:22.480 --> 00:25:28.320 And in, there is an another is one, is the end customer; okay, the last is the end customer. 00:25:29.200 --> 00:25:34.640 So, there is always a friction, there is a first thing, the there is always a friction 00:25:34.640 --> 00:25:38.800 between the seller and the buyer. Why there is a friction in the seller and the buyer? 00:25:38.800 --> 00:25:46.480 Because the seller will always want to make it as much as gross margin or the profit possible 00:25:46.480 --> 00:25:53.040 and the (intermedi) intermediary will try to make, their objective is to make, they make more money 00:25:53.040 --> 00:25:57.760 and they buy at a less discounted price from you. So, there is always a friction; 00:25:57.760 --> 00:26:02.720 as you know, the frictions generate heat, it generates amount of heat here. 00:26:02.720 --> 00:26:08.800 What happens? The distributors will continuously or there will continuously negotiate with you 00:26:08.800 --> 00:26:13.600 and continuously try to reduce the price; there is always a friction between these two. 00:26:14.960 --> 00:26:20.560 And then finally, there is an end customer who finally buys it from the distributor. 00:26:20.560 --> 00:26:26.080 So, what is the transaction cost? The cost of searching cost and the contracting cost. 00:26:26.080 --> 00:26:32.640 So, what is the pre ante cost? Typically, the search cost and the contracting cost. And 00:26:32.640 --> 00:26:38.880 post cost is the monitoring cost and enforcement cost. So, there are 2 cost elements there. Okay. 00:26:38.880 --> 00:26:45.120 So, I will come back much more little bit much more detail in the next slide. Okay. In this next, 00:26:45.120 --> 00:26:50.240 in my next presentation, I will come back to explain you the difference when you; 00:26:50.240 --> 00:26:55.040 when you understand and take the benefit of this transaction cost theory, 00:26:55.040 --> 00:27:01.440 then you can take a decision whether it is a time for you to move for for the uh direct operation 00:27:01.440 --> 00:27:05.840 or to build up your sales subsidiary. Okay. Right. Thank you. Thank you very much.