FACULTY OF BUSINESS AND ECONOMICS

INTERNATIONAL BUSINESS PROGRAM

STRATEGIC ALLIANCES
Session N° 16

Professor Maria Vera Castro

[email protected]
Foreign Operation Modes
Parish notices
Coming activities
DELIVERY OF FINAL
PROJECT REPORT

EXAM-3

FINAL PROJECT
PRESENTATIONS
Foreign Operation Modes
Companies expanding to international
markets
What are the basic decisions Firms make when
expanding globally?
Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which foreign operation mode to use
• exporting
• turnkey project
• licensing or franchising (strategic alliance) to a company in the host
nation
• establishing a joint venture (strategic alliance) with a local company
• establishing a new wholly owned subsidiary
• acquiring (merging or acquisition)
What influences the Choice of Entry Mode?

• Several factors affect the choice of entry mode including

✓ transport costs
✓ trade barriers
✓ political risks
✓ economic risks
✓ costs
✓ firm strategy

• The optimal mode varies by situation – what makes sense for one
company might not make sense for another
Which foreign markets should Firms enter?

• The choice of foreign markets will depend on their long-run profit

potential

• Favorable markets
✓ are politically stable
✓ have free market systems
✓ have relatively low inflation rates
✓ have low private-sector debt
Which foreign markets should Firms enter?

• Less desirable markets

✓ are politically unstable
✓ have mixed or command economies
✓ have excessive levels of borrowing

• Markets are also more attractive when the product in question is not
widely available and satisfies an unmet need
When should a Firm enter a foreign market?

Once attractive markets are identified, the firm must consider the timing of
entry
1. Entry is early when the firm enters a foreign market before other
foreign firms
2. Entry is late when the firm enters the market after firms have already
established themselves in the market
 Why enter a foreign market early?

• First-mover advantages include

✓ the ability to preempt rivals by establishing a strong brand name
✓ the ability to build up sales volume and ride down the experience
curve ahead of rivals and gain a cost advantage over later entrants
✓ the ability to create switching costs that tie customers into products or
services making it difficult for later entrants to win business
 Why enter a foreign market late?

• First-mover disadvantages include

✓ pioneering costs - arise when the foreign business system is so different
from that in the home market that the firm must devote considerable
time, effort and expense to learning the rules of the game
❑the costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes
❑the costs of promoting and establishing a product offering, including
the cost of educating customers
 On what scale should a Firm enter foreign
markets?

• After choosing which market to enter and the timing of entry, firms need to
decide on the scale of market entry
✓ firms that enter a market on a significant scale make a strategic
commitment to the market
❑the decision has a long-term impact and is difficult to reverse
✓ small-scale entry has the advantage of allowing a firm to learn about a
foreign market while simultaneously limiting the firm’s exposure to that
market
 Is there a “Right” way to enter
foreign markets?

➢ No, there are no “right” decisions when deciding which markets to enter, and
the timing and scale of entry - just decisions that are associated with different
levels of risk and reward
Foreign Operation Modes
 Foreign Operation Modes: How can firms
enter and operate in foreign Markets?

• The Foreign Operation Modes refer to a company’s way for entering and operating
in foreign markets, or the ‘how’ part of foreign operations, which has been
considered as basic to any discussions about companies’ international business
strategies and performance.
• It is indispensable to provide a comprehensive analysis and comparison about all
common foreign operation modes that a company can use to conduct
international business activities, including franchising, licensing, management
contracts, international outsourcing, project operations, exporting, alliances, and
foreign direct investment.
• At the strategy level, it is important to explain the choice, development,
combination and change among all foreign operation modes; at the
implementation level. So, you need detailed information about the use and
management of each foreign operation modes. Through combining international
business theories and practical insights, this course provides a skill set for
conducting and managing foreign operations.
 Foreign Operation Modes: How can firms
enter and operate in foreign Markets?

These are six different ways to enter and operate in a foreign market,
1. Exporting – a common first step for many manufacturing firms
• later, firms may switch to another mode
2. Turnkey projects - the contractor handles every detail of the project for a
foreign client, including the training of operating personnel
• at completion of the contract, the foreign client is handed the "key" to a
plant that is ready for full operation
 Foreign Operation Modes: How can firms
enter and operate in foreign markets?

3. Licensing - a licensor grants the rights to intangible property to the

licensee for a specified period, and in return, receives a royalty fee from
the licensee
• patents, inventions, formulas, processes, designs, copyrights,
trademarks.
4. Franchising - a specialized form of licensing in which the franchisor not
only sells intangible property to the franchisee but also insists that the
franchisee agree to abide by strict rules as to how it does business
• used primarily by service firms.
 Foreign Operation Modes: How can firms
enter and operate in foreign markets?

5. Joint ventures with a host country firm - a firm that is jointly owned by two or
more otherwise independent firms
• most joint ventures are 50–50 partnerships
6. Wholly owned subsidiary - the firm owns 100 percent of the stock
• set up a new operation
• acquire an established firm
 Why choose Exporting?

• Exporting is attractive because

✓ it avoids the costs of establishing local manufacturing operations
✓ it helps the firm achieve experience curve and location economies
• Exporting is unattractive because
✓ there may be lower-cost manufacturing locations
✓ high transport costs and tariffs can make it uneconomical
✓ agents in a foreign country may not act in exporter’s best interest
 Why choose a
Turnkey Arrangement?

• Turnkey projects are attractive because

✓ they are a way of earning economic returns from the know-how
required to assemble and run a technologically complex process
✓ they can be less risky than conventional FDI
• Turnkey projects are unattractive because
✓ the firm has no long-term interest in the foreign country
✓ the firm may create a competitor
✓ if the firm's process technology is a source of competitive advantage,
then selling this technology through a turnkey project is also selling
competitive advantage to potential and/or actual competitors
 Why choose Licensing?

• Licensing is a kind of non-equity alliance.

• Licensing is attractive because
✓ the firm avoids development costs and risks associated with opening a
foreign market
✓ the firm avoids barriers to investment
✓ the firm can capitalize on market opportunities without developing those
applications itself
• Licensing is unattractive because
✓ the firm doesn’t have the tight control required for realizing experience
curve and location economies
✓ the firm’s ability to coordinate strategic moves across countries is limited
✓ proprietary (or intangible) assets could be lost
❑ to reduce this risk, use cross-licensing agreements
 Why choose Franchising?

• Franchising is also a kind of non-equity alliance.

• Franchising is attractive because
✓ it avoids the costs and risks of opening up a foreign market
✓ firms can quickly build a global presence
• Franchising is unattractive because
✓ it inhibits the firm's ability to take profits out of one country to support
competitive attacks in another
✓ the geographic distance of the firm from its franchisees can make it difficult to
detect poor-quality.
 Why choose Joint Ventures?

• Joint ventures include, among others, contract manufacturing and

international transfer of technology.
• Joint ventures are attractive because
✓ firms benefit from a local partner's knowledge of the local market,
culture, language, political systems, and business systems
✓ the costs and risks of opening a foreign market are shared
✓ they satisfy political considerations for market entry
 Why choose Joint Ventures?

• Joint ventures are unattractive because:

✓ the firm risks giving control of its technology to its partner
✓ the firm may not have the tight control to realize experience curve or
location economies
✓ shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time
 Why choose a
wholly owned subsidiary?

• Wholly owned subsidiaries include mergers, acquisitions (brownfield) and

new investments (greenfield).
• Wholly owned subsidiaries are attractive because
✓ they reduce the risk of losing control over core competencies
✓ they give a firm the tight control in different countries necessary for
global strategic coordination
✓ they may be required to realize location and experience curve
economies
• Wholly owned subsidiaries are unattractive because
✓ the firm bears the full cost and risk of setting up overseas operations
 Which
entry
mode is
the best?
 How do core competencies
influence entry mode?

• The optimal entry mode depends on the nature of a firm’s core

competencies
• When competitive advantage is based on proprietary technological know-
how
✓ avoid licensing and joint ventures unless the technological advantage
is only transitory, or can be established as the dominant design
• When competitive advantage is based on management know-how
✓ the risk of losing control over the management skills is not high, and
the benefits from getting greater use of brand names is significant
 How do pressures for cost reductions
influence entry mode?

• When pressure for cost reductions is high, firms are more likely to pursue
some combination of exporting and wholly-owned subsidiaries
✓ allows the firm to achieve location and scale economies and retain some
control over product manufacturing and distribution
✓ firms pursuing global standardization or transnational strategies prefer
wholly-owned subsidiaries
 Which is better –
greenfield or acquisition?

The choice depends on the situation confronting the firm

1. A merger and also an acquisition (both on an existing company) are
brownfield.
An investment for building something from nothing is a greenfield
A greenfield strategy - build a subsidiary from the ground up
• you can build it according to the necessities.
• it will take a long time. Be careful with the market timing.
• a greenfield venture may be better when the firm needs to transfer
organizationally embedded competencies, skills, routines, and culture
 Which is better –
greenfield or acquisition?

2. An acquisition strategy – acquire an existing company

• an acquisition may be better when there are well-established
competitors or global competitors interested in expanding.
• the volume of cross-border acquisitions has been rising for the last
two decades
 Why choose acquisition?
• Acquisitions are attractive because
✓ they are quick to execute
✓ they enable firms to preempt their competitors
✓ they may be less risky than greenfield ventures
• Acquisitions can fail when
✓ the acquiring firm overpays for the acquired firm
✓ the cultures of the acquiring and acquired firm clash
✓ anticipated synergies are slow and difficult to achieve
✓ there is inadequate pre-acquisition screening
• To avoid these problems, firms should
✓ carefully screen the firm to be acquired
✓ move rapidly to implement an integration plan
 Why choose greenfield?

• The main advantage of a greenfield venture is that it gives the firm a

greater ability to build the kind of subsidiary company that it wants.
• But, greenfield ventures are slower to establish.
• Greenfield ventures are also risky.
• Be careful with market shifts.