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

© McGraw 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. 14-1

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

© McGraw Hill Companies, Inc., 2000 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

© McGraw Hill Companies, Inc., 2000 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. 14-4

© McGraw Hill Companies, Inc., 2000 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. 14-5

14-6 © McGraw Hill Companies, Inc., 2000

Entry Modes  Exporting  Turnkey Projects  Licensing  Franchising  Joint Ventures  Wholly Owned Subsidiaries 14-7

© McGraw Hill Companies, Inc., 2000 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. 14-8

© McGraw Hill Companies, Inc., 2000 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. 14-9

© McGraw Hill Companies, Inc., 2000 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 14-10

© McGraw Hill Companies, Inc., 2000 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

© McGraw Hill Companies, Inc., 2000 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

© McGraw Hill Companies, Inc., 2000 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

© McGraw Hill Companies, Inc., 2000 Advantages and Disadvantages of Entry Modes Entry ModeAdvantageDisadvantage ExportingAbility to realize location and experience curve economies High transport costs Trade barriers Problems with local marketing agents Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted Creating efficient competitors Lack of long-term market presence LicensingLow development costs and risks Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination Table 14.1a 14-14

© McGraw Hill Companies, Inc., 2000 Advantages and Disadvantages of Entry Modes Entry Mode AdvantageDisadvantage FranchisingLow development costs and risks Lack of control over quality Inability to engage in global strategic coordination Joint ventures Access to local partner’s knowledge Sharing development costs and risks Politically acceptable Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies Wholly owned subsidiaries Protection of technology Ability to engage in global strategic coordination Ability to realize location and experience economies High costs and risks Table 14.1b 14-15

© McGraw Hill Companies, Inc., 2000 Selecting an Entry Mode Technological Know-How Management 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. Franchising, subsidiaries (wholly owned or joint venture). Pressure for Cost Reduction Combination of exporting and wholly owned subsidiary

© McGraw Hill Companies, Inc., 2000 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

© McGraw Hill Companies, Inc., 2000 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 14-18

© McGraw Hill Companies, Inc., 2000 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 14-19

© McGraw Hill Companies, Inc., 2000 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 14-20

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

© McGraw Hill Companies, Inc., 2000 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 14-22

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

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