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Entry Strategy Chapter 12.

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Presentation on theme: "Entry Strategy Chapter 12."— Presentation transcript:

1 Entry Strategy Chapter 12


3 Key issues of entry strategy
Any firm contemplating foreign expansion must struggle with several decisions Which foreign market(s) to enter choose based on long-run profit potential Market size Growth rate Political stability Competition When On what scale Which mode of entry

4 When to enter? Advantages associated with entering early are “first-mover advantages” Ability to preempt rivals, establishing a strong brand name quickly Ability to build sales volume Ability of early entrants to create switching costs Disadvantages are “first-mover disadvantages” Pioneering costs - costs only an early entrant has to bear Possibility that regulations may change Regs change – P&G entered a lot of foreign markets in a period of extensive protectionism. Built factories that weren’t necessarily low cost, but got them into the country. If you go in selling toothbrushes today, you can make them wherever you want and ship them freely. Cell phones – in India Nokia spent a ton of money building relationships with a highly restrictive government, I understand things later became a lot less restrictive.

5 Scale of Entry Large scale entry Small scale entry
Strategic Commitments - decisions that have long-term impact and are difficult to reverse Local distributors, partners will take you seriously May cause rivals to rethink market entry But may lead local firms to attack aggressively Small scale entry Time to learn about market Reduces exposure risk But fast-moving competitor may beat you Whirlpool Duncan Hines vs. Nabisco


7 Entry Modes Firms can use six different methods to enter a market
Exporting Wholly Owned Subsidiaries (the most common kind of foreign direct investment) Licensing Franchising Joint Ventures Turnkey Projects


9 Wholly Owned Subsidiary (i.e., Foreign Direct Investment)
Advantages: No risk of losing technical competence to a competitor Tight control of operations Realize learning curve and location economies Disadvantage: Very expensive Bear full cost and risk Subsidiaries could be greenfield investments or acquisitions

10 Exporting Advantages: Disadvantages:
Avoids cost of establishing manufacturing operations May help achieve experience curve and location economies Disadvantages: Possible high transportation costs Tariff barriers Possible lack of control over marketing reps

11 Licensing and franchising
Reduces development costs and risks Works in unfamiliar or politically volatile market Overcomes investment barriers Others can develop business applications of your know-how Franchising Reduces costs and risk May prohibit movement of profits from one country to support operations in another Quality control Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. Franchiser sells intagible property and insists on rules for operating business

12 Joint Ventures Advantages: Disadvantages:
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

13 Turnkey projects Advantages: Disadvantages:
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 Contractor agrees to handle every detail of project for foreign client

14 Core Competencies and Entry Mode
If what you are good at is… Technological Know-How Avoid licensing and joint-venture arrangements Probably use a wholly owned subsidiary Exception: If the technological advantage is only transitory Management Know-How The firm’s valuable assets include a brand name Either franchising or wholly owned subsidiaries may work well Often times a joint venture is politically more acceptable

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