2 Entry Strategy and Strategic Alliances CHAPTER 14Entry Strategy and Strategic Alliances
3 Chapter Focus Examine: 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.
4 Which Foreign Markets Unfavorable Conditions Politically unstabledeveloping nations.Speculative financialbubbles have led toexcess borrowing.Favorable benefit-cost-risk trade-offPolitically stable nations.Free market systemsNo dramatic upsurgein inflation orprivate sector debt.Mixed or commandeconomies.Unfavorable Conditions
5 Timing of Entry First-mover advantage. Disadvantages: Preempt rivals and capture demand.Build sales volume.Move down experience curve before rivals and achieve cost advantage.Create switching costs.Disadvantages:First mover disadvantage - pioneering costs.Changes in government policy.Costs early entrantbears that laterentrant can avoid.
6 Scale of Entry and Strategic Commitments Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.Large scale entry:Commitment of significant resources.Easier to attract customers (will remain in market).May cause rivals to rethink market entry.Fewer resources to commit elsewhere.May lead to indigenous competitive response.PlusMinus
7 Scale of Entry and Strategic Commitments Small Scale Entry:Time to learn about the market.Limits company exposure.May be difficult to build market share.Difficult to capture first-mover advantages.PlusMinus
9 Exporting Advantages: Disadvantages: 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.
10 Turnkey Projects Advantages: Disadvantages: Contractor agreesto handle everydetail of projectfor foreign client.Turnkey ProjectsAdvantages: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.
11 Licensing Advantages: Disadvantages: Agreement wherelicensor grants rights tointangible property to anotherentity for a specified periodof time in returnfor royalties.LicensingAdvantages:Reduces development costs and risks of establishing foreign enterprise.Lack capital for venture.Unfamiliar or politically volatile market.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.Risk Reduction Cross-licensingJoint venture
12 for operating business. Franchiser sellsintangible propertyand insists on rulesfor operating business.FranchisingAdvantages:Reduces costs and risk of establishing enterprise.Disadvantages:May prohibit movement of profits from one country to support operations in another country.Quality control.
13 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.
14 Wholly Owned Subsidiary GreenfieldAcquisitionAdvantages: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.
15 Advantages and Disadvantages of Entry Modes ExportingAbility to realize location andexperience curve economiesHigh transport costsTrade barriersProblems with local marketing agentsTurnkeycontractsAbility to earn returns fromprocess technology skills incountries where FDI isrestrictedCreating efficient competitorsLack of long-term market presenceLicensingLow development costs andrisksLack of control over technologyInability to realize location andInability to engage in global strategic coordinationDisadvantageAdvantageEntry ModeTable 14.1a
16 Advantages and Disadvantages of Entry Modes FranchisingLow development costsand risksLack of control over qualityInability to engage in global strategiccoordinationJointventuresAccess to local partner’sknowledgeSharing development costsPolitically acceptableLack of control over technologyInability to realize location andexperience economiesWhollyownedsubsidiariesProtection of technologyAbility to engage in globalstrategic coordinationAbility to realize location andHigh costs and risksEntry ModeDisadvantageAdvantageTable 14.1b
17 Selecting an Entry Mode Technological Know-HowManagement Know-HowWholly 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.Franchising, subsidiaries (wholly owned or joint venture).Pressure for Cost ReductionCombination of exporting and wholly owned subsidiary.
18 Establishing a Wholly Owned Subsidiary Green-field or Acquisition? Pro:Quick to execute.Preempt competitors.Possibly less risky.Con:Often produce disappointing results.Overpay for firm.Too optimistic about value creation (hubris).Culture clash.Problems with proposed synergies.Pro:Can build subsidiary it wants.Easy to establish operating routines.Con:Slow to establish.Risky.Preemption by aggressive competitors.1. Don’t paytoo much.2. Avoidsurprises.3. Pickcompatibleculture.
19 Acquisition or Green-field? Well-established,incumbent firms.Competitorsinterested inentry.AcquisitionOrganizationallyembedded skills,routines,culture.Nocompetitors.Green-field
20 Strategic Alliances Advantages: Disadvantage: Cooperative agreements betweenpotential 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.
22 Partner SelectionGet as much information as possible on the potential partnerCollect data from informed third partiesformer partnersinvestment bankersformer employeesGet to know the potential partner before committing
23 Structuring the Alliance to Reduce Opportunism Opportunism by partnerreduced by:Seeking crediblecommitmentsAgreeing to swapvaluable skillsand technologiesEstablishingcontractualsafeguardsWalling offcritical technologyFigure 14.1
24 Managing the AllianceBuildingTrustLearningfromPartners