CHAPTER 14 Entry Strategy and Strategic Alliances 14

CHAPTER 14 Entry Strategy and Strategic Alliances

14 -2 Learning Objectives n Which foreign markets to enter? n n n Evaluation the modes of entry n n n Mc. Graw-Hill/Irwin Early or Late Entry? Large scale or small scale entry? Exporting Licensing Turnkey Projects © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 2

14 -3 Learning Objectives n Evaluation the modes of entry n n Mc. Graw-Hill/Irwin Franchising Joint Ventures Wholly Owned Subsidiary Application to selected products © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 3

14 -4 Chapter Focus n Examine: n n n Mc. Graw-Hill/Irwin The decision on which foreign markets to enter, when to enter them, and on what scale. The choice of entry mode. The role of strategic alliances. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 4

14 -5 Which Foreign Markets Favorable benefit-cost-risk trade-off Politically stable nations. No dramatic upsurge in inflation or private sector debt. Free market systems Politically unstable developing nations. Speculative financial bubbles have led to excess borrowing. Mc. Graw-Hill/Irwin Mixed or command economies. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 5

14 -6 Timing of Entry n First-mover advantage. n n n Preempt rivals and capture demand. Build sales volume. Move down experience curve before rivals and achieve cost advantage. Costs early entrant Create switching costs. bears that later Disadvantages: n n entrant can avoid. First mover disadvantage - pioneering costs. Changes in government policy. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 6

14 -7 Scale of Entry and Strategic Commitments n n Strategic Commitments - a decision that has a longterm impact and is difficult to reverse. Large scale entry: Plus n n n Commitment of significant resources. Easier to attract customers (will remain in market). May cause rivals to rethink market entry. Minus n n Mc. Graw-Hill/Irwin Fewer resources to commit elsewhere. May lead to indigenous competitive response. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 7

14 -8 Scale of Entry and Strategic Commitments n Small Scale Entry: Plus n n Time to learn about the market. Limits company exposure. Minus n n Mc. Graw-Hill/Irwin May be difficult to build market share. Difficult to capture first-mover advantages. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 8

14 -9 Entry Modes Joint Ventures Exporting Licensing Turnkey Projects Franchising Mc. Graw-Hill/Irwin Wholly Owned Subsidiaries © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 9

14 -10 Exporting n Advantages: n n n Avoids cost of establishing manufacturing operations. May help achieve experience curve and location economies. Disadvantages: n n May compete with low-cost location manufacturers. Possible high transportation costs. Tariff barriers. Possible lack of control over marketing reps. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 10

14 -11 Turnkey Projects n Advantages: n n n Contractor agrees to handle every detail of project foreign client. Can earn a return on knowledge asset. Less risky than conventional FDI. Disadvantages: n n n No long-term interest in the foreign country. May create a competitor. Selling process technology may be selling competitive advantage as well. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 11

14 -12 Licensing n n Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. Advantages: n Reduces development costs and risks of establishing foreign enterprise. n Lack capital for venture. n Unfamiliar or politically volatile market. n Overcomes restrictive investment barriers. n Others can develop business applications of intangible property. Disadvantages: Risk Reduction n Lack of control. Cross-licensing n Cross-border licensing may be difficult. Joint venture n Creating a competitor. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 12

14 -13 Franchiser sells intangible property and insists on rules for operating business. n Advantages: n n Reduces costs and risk of establishing enterprise. Disadvantages: n n Mc. Graw-Hill/Irwin Franchising May prohibit movement of profits from one country to support operations in another country. Quality control. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 13

14 -14 Joint Ventures n n Advantages: n Benefit from local partner’s knowledge. n Shared costs/risks with partner. n Reduced political risk. Disadvantages: n Risk giving control of technology to partner. n May not realize experience curve or location economies. n Shared ownership can lead to conflict. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 14

14 -15 Wholly Owned Subsidiary Greenfield Acquisition n n Mc. Graw-Hill/Irwin Advantages: n No risk of losing technical competence to a competitor. n Tight control of operations. n Realize learning curve and location economies. Disadvantage: n Bear full cost and risk. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 15

14 -16 Advantages and Disadvantages of Entry Modes Entry Mode Advantage Disadvantage High transport costs Trade barriers Problems with local marketing agents Exporting Ability to realize location and experience curve economies Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted Creating efficient competitors Lack of long-term market presence Licensing Low development costs and risks Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination Table 14. 1 a Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 16

14 -17 Advantages and Disadvantages of Entry Modes Entry Mode Advantage Disadvantage Franchising Low development costs and risks Lack of control over quality Inability to engage in global strategic coordination Joint ventures Access to local partner’s knowledge Sharing development costs and risks Politically acceptable Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies Wholly owned subsidiaries Table 14. 1 b Mc. Graw-Hill/Irwin Protection of technology High costs and risks Ability to engage in global strategic coordination Ability to realize location and experience economies © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 17

14 -18 Selecting an Entry Mode Technological Know-How Wholly owned subsidiary, except: 1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory. Then licensing or joint venture OK. Management Know-How Pressure for Cost Reduction Mc. Graw-Hill/Irwin Franchising, subsidiaries (wholly owned or joint venture). Combination of exporting and wholly owned subsidiary. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18