Entry Strategy and Strategic Alliances Chapter 14 Mc

Entry Strategy and Strategic Alliances Chapter 14 © Mc. Graw Hill Companies, Inc. , 2000

¥Operating in Japan for 35 years. ¥First foreign securities firm in Japan. ¥Only foreign securities firm listed on the Tokyo Stock Exchange. ¥Analysts provide research on over 300 companies. © Mc. Graw Hill Companies, Inc. , 2000 14 -1

Basic Entry Decisions ¥Which markets to enter? ¥When to enter the markets? ¥What scale of entry? © Mc. Graw Hill Companies, Inc. , 2000 14 -2

Which Foreign Markets ¥Favorable benefit-cost-risk-trade-off: ¤Politically stable developed and developing nations. ¤Free market systems ¤No dramatic upsurge in inflation or private-sector debt. ¥Unfavorable ¤Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing. . © Mc. Graw Hill Companies, Inc. , 2000 14 -3

Timing of Entry ¥Advantages in early market entry: ¤First-mover advantage. ¤Build sales volume. ¤Move down experience curve and achieve cost advantage. ¤Create switching costs. ¥Disadvantages: ¤First mover disadvantage - pioneering costs. ¤Changes in government policy. © Mc. Graw Hill Companies, Inc. , 2000 14 -4

Scale of Entry ¥Large scale entry ¤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: ¤Time to learn about market. ¤Reduces exposure risk. © Mc. Graw Hill Companies, Inc. , 2000 14 -5

© Mc. Graw Hill Companies, Inc. , 2000 14 -6

Entry Modes ¥Exporting ¥Turnkey Projects ¥Licensing ¥Franchising ¥Joint Ventures ¥Wholly Owned Subsidiaries © Mc. Graw Hill Companies, Inc. , 2000 14 -7

Exporting ¥Advantages: ¤Avoids cost of establishing manufacturing operations. ¤May help achieve experience curve and location economies. ¥Disadvantages: ¤May compete with low-cost location manufacturers. ¤Possible high transportation costs. ¤Tariff barriers. ¤Possible lack of control over marketing reps. © Mc. Graw Hill Companies, Inc. , 2000 14 -8

Turnkey Projects ¥Advantages: ¤Can earn a return on knowledge asset. ¤Less risky than conventional FDI. ¥Disadvantages: ¤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 Companies, Inc. , 2000 14 -9

Licensing ¥Advantages: ¤Reduces costs and risks of establishing enterprise. ¤Overcomes restrictive investment barriers. ¤Others can develop business applications of intangible property. ¥Disadvantages: ¤Lack of control. ¤Cross-border licensing may be difficult. ¤Creating a competitor © Mc. Graw Hill Companies, Inc. , 2000 14 -10

Franchising ¥Advantages: ¤Reduces costs and risk of establishing enterprise. ¥Disadvantages: ¤May prohibit movement of profits from one country to support operations in another country. ¤Quality control. © Mc. Graw Hill Companies, Inc. , 2000 14 -11

Joint Ventures ¥Advantages: ¤Benefit from local partner’s knowledge. ¤Shared costs/risks with partner. ¤Reduced political risk. ¥Disadvantages: ¤Risk giving control of technology to partner. ¤May not realize experience curve or location economies ¤Shared ownership can lead to conflict. © Mc. Graw Hill Companies, Inc. , 2000 14 -12

Wholly Owned Subsidiary ¥Advantages: ¤No risk of losing technical competence to a competitor. ¤Tight control of operations. ¤Realize learning curve and location economies. ¥Disadvantage: ¤Bear full cost and risk. © Mc. Graw Hill Companies, Inc. , 2000 14 -13

Advantages and Disadvantages of Entry Modes Entry Mode Advantage 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 Licensing Low development costs and risks Table 14. 1 a © Mc. Graw Hill Companies, Inc. , 2000 Disadvantage High transport costs Trade barriers Problems with local marketing agents Creating efficient competitors Lack of long-term market presence Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination 14 -14

Advantages and Disadvantages of Entry Modes Entry Mode Advantage Disadvantage Franchising Low development costs and Lack of control over quality risks Inability to engage in global strategic coordination Joint ventures Access to local partner’s Lack of control over technology knowledge Inability to engage in global strategic Sharing development costs coordination and risks Inability to realize location and Politically acceptable experience economies Wholly Protection of technology High costs and risks owned Ability to engage in global subsidiaries strategic coordination Ability to realize location and experience economies Table 14. 1 b © Mc. Graw Hill Companies, Inc. , 2000 14 -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 Companies, Inc. , 2000 Franchising, subsidiaries (wholly owned or joint venture). Combination of exporting and wholly owned subsidiary. 14 -16

Strategic Alliances ¥ Cooperative agreements between potential or actual competitors. ¥ Advantages: ¤Facilitate entry into market. ¤Share fixed costs. ¤Bring together skills and assets that neither company has or can develop. ¤Establish industry technology standards. ¥ Disadvantage: ¤Competitors get low cost route to technology and markets. © Mc. Graw Hill Companies, Inc. , 2000 14 -17

Alliances Are Popular ¥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 Companies, Inc. , 2000 14 -18

Global Alliances, however, are different ¥Companies 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 Companies, Inc. , 2000 14 -19

Partner Selection ¥Get as much information as possible on the potential partner ¥Collect data from informed third parties ¤former partners ¤investment bankers ¤former employees ¥Get to know the potential partner before committing © Mc. Graw Hill Companies, Inc. , 2000 14 -20

Structuring the Alliance to Reduce Opportunism Walling off critical technology Establishing contractual safeguards Opportunism by partner reduced by: Figure 14. 1 © Mc. Graw Hill Companies, Inc. , 2000 Agreeing to swap valuable skills and technologies Seeking credible commitments 14 -21

Characteristics of a Global Alliance ¥Players are independent prior to the creating of the alliance ¥Players share ¤benefits of the alliance ¤control over operations ¥Players continue to contribute ¤technology ¤products © Mc. Graw Hill Companies, Inc. , 2000 14 -22

Characteristics of a Strategic Alliance Benefits Independence of Participants Technology Products Control Shared Benefits © Mc. Graw Hill Companies, Inc. , 2000 Ongoing Contributions Markets Cooperation 14 -23

Problems with Strategic Alliances ¥Have to give up some authority/control ¥Could be strengthening a future competitor ¤Technology transfer ¤Management practices ¤Operating procedures © Mc. Graw Hill Companies, Inc. , 2000 14 -24