Lecture 11

Entry Strategy
and Strategic
Alliances

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 entry mode to use:
exporting
licensing or franchising to a company in the host
nation
establishing a joint venture with a local company
establishing a new wholly owned subsidiary
acquiring an established enterprise
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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
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1. 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
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
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2(a). Timing of Entry

Question: 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
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Why Enter a Foreign

Market Early?
First mover advantages include
the ability to pre-empt 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
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Why Enter a Foreign

Market Late?
First mover disadvantages include
pioneering costs - arise when the foreign
business system is so different from that in
a firms 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
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2(b). Scale of Entry

After choosing which market to enter and the
timing of entry, firms need to decide on the
scale of market entry
entering a foreign market on a significant scale is a
major strategic commitment that changes the
competitive playing field

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 firms exposure to that market
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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
Firms in developing countries can learn
from the experiences of firms in
developed countries
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3. Entry Modes
Question: What is the best way to enter a
foreign market?
Answer:
Firms can enter foreign market through
1. Exporting
2. Turnkey projects
3. Licensing
4. Franchising
5. Joint ventures
6. Wholly owned subsidiaries
Each mode has advantages and disadvantages

Entry Modes
These are six different ways to enter a foreign
market:
1.Exporting - 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
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Entry Modes
3. Licensing - a licensor grants the rights to
intangible property to the licensee for a
specified time period, and in return, receives
a royalty fee from the licensee
intangible property includes 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
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Entry Modes
4. 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

5. Wholly owned subsidiary - the firm

owns 100 percent of the stock
Firms establishing a wholly owned subsidiary
can
set up a new operation
acquire an established firm
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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
exporters best interest
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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
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Why Choose Licensing?

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 doesnt have the tight control required for
realizing experience curve and location economies
the firms ability to coordinate strategic moves
across countries is limited
proprietary (or intangible) assets could be lost
to reduce this risk, firms can use cross-licensing
agreements
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Why Choose Franchising?

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
franchisees can make it difficult to detect poor
quality
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Why Choose Joint

Ventures?
Joint ventures are attractive because
firms benefit from a local partner's knowledge of local
conditions, 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

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
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Why Choose a Wholly

Owned Subsidiary?
Wholly owned subsidiaries are attractive
because
they reduce the risk of losing control over core
competencies
they give a firm the tight control over operations in
different countries that is necessary for engaging in
global strategic coordination
they may be required in order 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
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Which Entry Mode is

Best?
Advantages and Disadvantages of Entry Modes

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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
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Which is Better
Greenfield or
Acquisition?
The choice depends on the situation
confronting the firm
1.A greenfield strategy - build a subsidiary
from the ground up
greenfield venture may be better when the firm
needs to transfer organizationally embedded
competencies, skills, routines, and culture

2.An acquisition strategy acquire an

existing company
acquisition may be better when there are wellestablished competitors or global competitors
interested in expanding
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Pros & Cons of

Acquisitions
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
attempts to realize synergies run into roadblocks and take
much longer than forecast
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
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Pros & Cons of

Greenfield Ventures
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
However, greenfield ventures:
are slower to establish
are risky because they have no proven track
record
can be problematic if a competitor enters via
acquisition and quickly builds market share
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Strategic Alliances
Strategic alliances refer to
cooperative agreements between
potential or actual competitors
Example:
formal joint ventures
short-term contractual agreements

the number of strategic alliances has

exploded in recent decades
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Why Choose
Strategic Alliances?
Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs and risks of
developing new products or processes
bring together complementary skills and assets
that neither partner could easily develop on its own
help a firm establish technological standards for the
industry that will benefit the firm

But, the firm needs to be careful not to give

away more than it receives

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What Makes
Strategic Alliances
Successful?
The success of an alliance is a function of
1.Partner selection
A good partner
helps the firm achieve its strategic goals
and has the capabilities the firm lacks
and that it values
shares the firms vision for the purpose
of the alliance
will not exploit the alliance for its own
ends
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What Makes
Strategic Alliances
Successful?

2.Alliance structure
The alliance should

make it difficult to transfer technology not meant to be

transferred
have contractual safeguards to guard against the risk of
opportunism by a partner
allow for skills and technology swaps with equitable gains
minimize the risk of opportunism by an alliance partner

3.The manner in which the alliance is managed

Requires
interpersonal relationships between managers
learning from alliance partners

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End A Case

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