Chapter 14 Entry Strategy and Strategic Alliances 2

Chapter 14 Entry Strategy and Strategic Alliances

2 Case: Diebold n n n Began to sell ATM machines in foreign markets in 1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebold’s total revenues Diebold decides to go it alone with local manufacturing presence for local customization n n Through acquisitions joint ventures Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

3 Basic foreign expansion entry decisions n n A firm contemplating foreign expansion must make three decisions Which markets to enter When to enter these markets What is the scale of entry Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

4 Which foreign markets n Favorable n n Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or privatesector debt Unfavorable n Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

5 Timing of entry n Advantages in early market entry: n n n First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs. Disadvantages: n n First mover disadvantage - pioneering costs. Changes in government policy. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

6 Scale of entry n Large scale entry n n Strategic Commitments - a decision that has a long-term impact and is difficult to reverse. May cause rivals to rethink market entry. May lead to indigenous competitive response. Small scale entry: n n Time to learn about market. Reduces exposure risk. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 Entry modes n n n Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 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 International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

9 Turnkey projects n Advantages: n n n Can earn a return on knowledge asset agrees Less risky than conventional FDI Contractor to handle every Disadvantages: n n n detail of project foreign client 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 International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

10 Licensing: Advantages Reduces development costs and risks of establishing foreign enterprise. n Lack capital for venture. n Unfamiliar or politically volatile market. n Overcomes restrictive Agreement where investment barriers. licensor grants rights to intangible property to another n Others can develop business entity for a specified period of time in return applications of intangible for royalties. property. n Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

11 Franchising n Advantages: n n Reduces costs and risk of establishing enterprise Disadvantages: n n May prohibit movement of profits from one country to support operations in another country Quality control Franchiser sells intangible property and insists on rules for operating business Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

12 Joint Ventures n Advantages: n n Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk. Disadvantages: n n n Risk giving control of technology to partner. May not realize experience curve or location economies. Shared ownership can lead to conflict Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

13 Wholly owned subsidiary n n Subsidiaries could be Greenfield investments or acquisitions Advantages: n n No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies. Disadvantage: n Bear full cost and risk Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

14 Advantages and disadvantages of entry modes Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

15 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 International Business, 5/e Franchising, subsidiaries (wholly owned or joint venture) Combination of exporting and wholly owned subsidiary © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 Acquisition and Green-field- pros & cons Greenfield Acquisition n Pro: Quick to execute n Preempt competitors n Possibly less risky Con: Disappointing results Overpay for firm optimism about value creation (hubris) Culture clash. Problems with proposed synergies n Pro: n Can build subsidiary it wants n Easy to establish operating routines Con: n Slow to establish n Risky n Preemption by aggressive competitors n n Mc. Graw-Hill/Irwin International Business, 5/e n © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

17 Acquisition or Green-field? Well-established, incumbent firms. Competitors interested in entry. Acquisition embedded skills, routines, culture. Green-field No competitors Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

18 Strategic Alliances n n Cooperative agreements between potential or actual competitors. Advantages: n n n Facilitate entry into market Share fixed costs Bring together skills and assets that neither company has or can develop Establish industry technology standards Disadvantages: n Competitors get low cost route to technology and markets Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

19 Alliances are popular n n n High cost of technology development Company may not have skill, money or people to go it alone Good way to learn Good way to secure access to foreign markets Host country may require some local ownership Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

20 Global Alliances, however, are different n n n Firms join to attain world leadership Each partner has significant strength to bring to the alliance A true global vision Relationship is horizontal not vertical When competing in markets not part of alliance, they retain their own identity Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

21 Partner selection n n Get as much information as possible on the potential partner Collect data from informed third parties n n Former partners Investment bankers Former employees Get to know the potential partner before committing Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

22 Structuring the alliance to reduce opportunism Fig 14. 1 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

23 Characteristics of a strategic alliance Benefits Independence of Participants Technology Products Control Shared Benefits Mc. Graw-Hill/Irwin International Business, 5/e Ongoing Contributions Markets Cooperation 14 -23 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

24 Managing the alliance n Build trust n n Relational capital Learning from partners n Diffusion of knowledge Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.