INTERNATIONAL BUSINESS

Professor H. Michael Boyd, Ph.D.

Chapter 14 Entry Strategy and Strategic Alliances

Basic Foreign Entry Decisions

Which foreign markets to enter? When to enter them? What scale? Which entry mode? There are no right decisions.just decisions that are associated with different levels of risk and reward

Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?
What scale? Which entry mode?

Which Foreign Markets

With over 200 nations in the world. and they do not all hold the same profit potential The decision to enter which market will be based on the assessment of the nations long-run profit potential The firm needs to consider the benefits, costs and risks of doing business in that country But be careful of this generalization..a firm may enter a market due to multi-point competition and may not be seeking profits in this specific market

Which Foreign Markets

Long-run economic benefits of doing business in a country are a function of: size of the market purchasing power of consumers future wealth of consumers future economic growth rates suitability of the product for the market indigenous competition political stability

Which Foreign Markets

Favorable 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 Where speculative financial bubbles have led to excess borrowing

Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?

What scale? Which entry mode?

Timing of Entry
First-Mover Advantage

Preempt rivals and capture demand by establishing a strong brand Build sales volume and move down experience curve before rivals and achieve cost advantage Create switching costs that tie customers to your products or services and creates an entry barrier for later entrants into the market

Timing of Entry
First-Mover Disadvantages

Pioneering costs that a later entrant can avoid

starting at the bottom of the experience curve with the risk of failure due to operating in uncertainty promoting and establishing a new business mode or product and educating the consumer changes in government policy and regulations after entry into the market

Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?

What scale?
Which entry mode?

Strategic Commitments

When entering in a rapid and significant scale, this level of strategic commitment might: have a long-term impact on the firm be difficult to reverse influence the nature of competition in the market result in a strategic response by a local competitor

Large-Scale Entry
Advantages Easier to attract customers and distributors May cause rivals to rethink market entry Might allow you to capture first-mover advantages over a small-scale entrant Disadvantages Higher risks associate with large investment Fewer resources to commit elsewhere May lead to indigenous competitive response

Small-Scale Entry
Advantages Limits business risks by allowing the firm to learn about the market Allows firm to gain market knowledge before making strategic decisions and large-scale investment Disadvantages May be difficult to build market share Difficult to capture first-mover advantages

Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them? What scale?

Which entry mode?

Entry Modes

Exporting

Turnkey Projects
Licensing Franchising

Joint Ventures
Wholly Owned Subsidiaries

Determinants of Which Entry Mode

The optimal mode varies for each market situation depending on the: transportation costs trade barriers political risks economic risks business risks costs and required investment firms strategy Different firms may enter the same market with different entry modes

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 and non-tariff barriers Possible lack of control over marketing and sales by delegating to agents

Turnkey Project
Allows a firm to export process technology Contractor agrees to handle every detail of project for foreign client

design construction training consultation and technical support

At completion of contract, the foreign client is handed the key to the project Most common in process technology industries

chemical pharmaceutical petroleum refining metal refining

Turnkey Projects
Advantages A means of exporting process technologies Can earn a return on valuable knowledge assets Can overcome FDI restrictions Less risky than conventional FDI Disadvantages No long-term interest in the foreign country May create a competitor Selling process technology may be selling the firms core competency and competitive advantage

Licensing
Agreement where licensor grants rights to intangible property to another entity (licensee) for a specified period, in return for a royalty fee Intangible property may be: patents, inventions formulas processes designs, copyrights trademarks

Advantages of Licensing

Reduces development costs and risks of opening a foreign market Attractive for firms that: lack capital are unwilling to take financial risk in an unfamiliar or politically volatile foreign market must overcome restrictive investment barriers does not want to develop the business applications of an intangible property

Disadvantages of Licensing

Limits the firms control over production, marketing and strategy to required to realize experience curve and location economies Limits the firms ability to coordinate strategic moves across countries (cross-subsidization) Loss of technology and the creation of a potential competitor

Reducing the Risk of Licensing

Cross-Licensing An agreement in which a company licenses valuable intangible property to a foreign partner and also receives a license for the partners valuable knowledge

allows firms to hold each other hostage

Joint Venture License technology through a joint venture where the licensor and licensee have important equity stakes and aligns the interests of both firms

Franchising
A specialized form of licensing in which the franchiser sells intangible property to the franchisee and insists on rules for operating the business Tends to involve longer term commitments than licensing Franchisor often assists the franchisee to run the business on an ongoing basis Primarily in the service sector

Franchising
Advantages Reduces costs and risk of opening foreign market Allows a firm to rapidly and inexpensively build a global presence Disadvantages May inhibit taking profits from one country to support competitive attacks in another country Quality control and protecting brand equity

Joint Venture
Establishing a firm that is jointly owned by two or more otherwise independent firms

Typical ownership is 50/50but not always Having 50% or more does not necessarily mean that you have control of the joint venture

Joint Ventures
Advantages Benefit from local partners knowledge of market Share costs and risks with partner Reduce political risk Overcome investment barriers

Disadvantages Risk giving control of technology to partner May not have the necessary control to realize experience curve or location economies Limits ability to engage in coordinated global strategy Shared ownership can lead to conflict over goals and control

Wholly Owned Subsidiary

The firm owns 100 percent of the stock and establishes their presence via a greenfield venture or an acquisition of an existing firm

Wholly Owned Subsidiary

Advantages No risk of losing control of core competency or technology to a competitor Tight control over operations in different countries Helps realize learning curve and location economies Disadvantages Bear full cost and risk of foreign market entry Lack of local knowledge culture and consumer competition and consumers politics and laws

Selecting an Entry Mode

Selecting an Entry Mode

All entry modes have advantages and disadvantages When determining which entry mode the firm must consider the trade-offs between each entry mode There are no right decisions.just decisions that are associated with different levels of risk and reward

Core Competencies and Entry Mode

Optimal entry mode partly depends on the nature of the firms core competency Technological Know-How
licensing and joint venture should be avoided to reduce risk of losing technology wholly owned subsidiaries overcomes this risk exceptions to this rule exist

Management Know-How

franchising and subsidiaries (joint ventures) with control over the operations to protect brand equity

Cost Pressures and Entry Mode

The greater the pressures for cost reductions, the more likely a firm will pursue a combination of exporting and wholly owned subsidiaries Wholly owned subsidiaries are generally preferred by firms that are pursuing global standardization or transnational strategies

Greenfield Venture or Acquisition?

Acquisitions
Advantages Quick to execute Preempt competitors Possibly less risky than greenfield ventures because the firm is buying assets that are producing revenue and local knowledge Disadvantages Often produce poor results due to

overpayment for acquired firms assets overestimate of the potential for value creation (hubris) culture clash between firms problems with proposed operational synergies inadequate pre-acquisition screening

Reducing the Risk of Acquisition Failure

Carefully screen the targeted foreign firm and audit

operations and true value of technology and/brand financial and market position management culture

Reduce local management attrition from acquired firm

Quickly implement an integration plan

Greenfield Venture
Advantages Can build subsidiary it designs--not acquires Easier to establish own operating routines Avoids the unknown surprises with an acquisition Disadvantages Slow to establish Uncertainty and risky Preemption by aggressive competitor via acquisition Adds new capacity to industry

Acquisition or Green-Field Venture?

Well-established, incumbent firms

Acquisition
Competitors also interested in entry

Embedded skills, routines, culture

No competitors

Green-Field Venture

Strategic Alliances
Cooperative agreements between potential or actual competitors

Includes the range from joint ventures to short-term contractual agreements on specific tasks Contentious debate if they create any value only overcome short-term weaknesses competitively weaken a firm in the long term

Strategic Alliances
Advantages

Facilitate entry and gain access into market Overcome local ownership regulations Learn about the market or technology Share fixed costs and risks (especially in R & D) Bring together complimentary skills and assets that neither firm has or can develop Establish industry technological standards

Strategic Alliances
Disadvantages

Provides potential competitors a low-cost route to technology and markets Limits strategic degrees of freedom

Often is difficult and ends in divorce

The Right Partner

A good partner:

helps the firm achieve its strategic goals has skills that the firm lacks and values shares the firms vision for the alliance will not opportunistically exploit the alliance

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

Partner Selection Criteria

Complimentary technical skills and resources Moderate level of mutual dependency (needs) Adequate financial resources to grow venture Comparable size and sophistication Similar values and goals Compatible operating procedures Consider potential communication barriers Compatible management teams Mutual understanding, trust, and commitment

Alliance Structure
Overcoming Opportunism by Partner

Design alliance to avoid unwanted technology transfer

Establish contractual safeguards Swap valuable skills and technologies (cross-license) Seek credible commitments

Managing the Alliance

Acknowledge that the alliance is dynamic Build trust and personal relationships (relational capital) Learn from alliance partner and apply the knowledge within the parent firm Maintain balance of partner participation