Chapter 14 Entry Strategy and Strategic Alliances

Introduction Firms expanding internationally must decide: Which markets to enter When to enter and on what scale Which entry mode to use There are no “right” decisions when deciding which markets to enter, the timing, and scale of entry, just decisions that are associated with different levels of risk and reward Factors affecting the decisions may include transport costs, trade barriers, political and economic risks, and firm strategy

Which Foreign Markets? The choice of foreign markets will depend on their long-term profit potential Favorable markets are politically stable nations with free market systems and relatively low inflation rates and private sector debt Less desirable markets are politically unstable nations with mixed or command economies, or nations with excessive levels of borrowing Markets are also more attractive when the product in question is not widely available and satisfies an unmet need

Timing of Entry Once attractive markets are identified, the firm must consider the timing of entry First mover advantages are the advantages of entering a market early, including the ability to: Pre-empt rivals and capture demand by establishing a strong brand name Build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants Create switching costs that tie customers into products or services, making it difficult for later entrants to win business

Timing of Entry First mover disadvantages are those associated with entering a foreign market that a later entrant can avoid, primarily entailing pioneering costs Pioneering costs include: Considerable time, effort and expense to learn rules of the game in different foreign business systems The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes The costs of promoting and establishing a product offering, including the cost of educating customers

Scale of Entry Entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field Firms that enter a market on a significant scale make a strategic commitment to the market; the decision has a long term impact and is difficult to reverse Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market Management Focus: International Expansion at ING Group Summary This feature describes ING Group’s rapid expansion into the United States. ING, the third largest bank in the Netherlands, primarily expands through acquisitions. The company is seeking to be one of the top 10 financial services firms in the world. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. What makes ING’s strategy in its quest to become one of the top 10 financial services firms in the world so successful? What does ING’s entry into the United States market mean for competitors? Discussion Points: Many students will probably suggest that ING’s strategy is so successful because rather than growing its business from the ground up, it acquires existing firms, leaves them largely intact so as to retain the existing employees and customers, but adds in the ING name and products in order to capitalize on a global brand name. For American companies, ING’s presence in the market is significant. In just a few years, the company has gone from having virtually no position in the market, to being one of the country’s top 10 financial services firms. As it continues to build its name, American competitors and foreign companies will probably find it more and more difficult to break into the market in a meaningful way. 2. How did ING approach the United States? How did the company signal its commitment to the market? What effect will this commitment have for ING? Discussion Points: ING followed the same strategy in the United States that had proved to be successful in other countries. The company identified companies that it could acquire, left the companies’ management and products in place, and then, added in ING products and names. Because the United States is the world’s largest financial market, ING recognized that to be a key player, it would need a significant market presence. To become one of the 10 largest companies in the industry, the company embarked on a series of acquisitions beginning with the Equitable Life Insurance Company of Iowa in 1997. Another Perspective:Explore ING’s international operations by going to the company’s homepage at {http://www.ing.com}, clicking on “Personal Finance” and then on the country of your choice.

Entry Modes Six different ways to enter a foreign market: 1. Exporting 2. Turnkey projects 3. Licensing 4. Franchising 5. Joint ventures (JVs) with a host country firm 6. Setting up a new wholly owned subsidiary The optimal mode varies by situation and managers need to consider the advantages and disadvantages of each entry mode Management Focus: The Jollibee Phenomenon—A Philippine Multinational Summary This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player. Suggested Discussion Questions 1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date? Discussion Points: Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee’s performance so far. Jollibee has managed to survive McDonald’s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald’s strategy of having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald’s home market, and become a niche player in the fast food industry. 2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s sees its path to success as offering a fairly standardized menu everywhere whereas Jollibee views localization as its ticket to success. In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald’s? Discussion Points: Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach it would have failed. Students might note that McDonald’s global success with this strategy is due in part to the fact that it is a symbol of America, and as such offers an American experience in other markets. Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete. Another Perspective: It is worth visiting Jollibee’s web page to see the American influence on the company. Go to {http://www.jollibee.com.ph/} and click on “International” to explore some of the company’s foreign locations.

Exporting Exporting is a common first step for manufacturing firms to serve a foreign market Exporting is attractive because it: Avoids the costs of establishing local manufacturing operations Helps the firm achieve experience curve and location economies Exporting is unattractive because: There may be lower-cost manufacturing locations High transport costs and tariffs Foreign agents may not act in exporters’ best interest

Turnkey Projects At completion of a turnkey project, the foreign client is handed the "key" to a plant that is ready for full operation. Turnkey projects are common in the chemical, pharmaceutical, petroleum refining, and metal refining industries Turnkey projects are attractive because of earning economic returns from the know-how and can be less risky than conventional FDI They are unattractive because the firm that enters into a turnkey deal will have no long-term interest in the foreign country and may lead to potential and/or actual competitors

Licensing A licensing is an arrangement whereby a licensor grants the rights of its intangible property (e.g., patents, inventions, formulas, processes, designs, copyrights, and trademarks) to another entity (licensee) to use for a specified time period for a royalty fee Licensing is unattractive because it doesn’t have the tight control over manufacturing, marketing, and strategy and its proprietary (or intangible) assets could be lost One way of reducing this risk is through cross-licensing agreements where a firm might license intangible property to a foreign partner, but requests that the partner license some of its valuable know-how to the firm in addition to a royalty payment

Franchising Franchising is a specialized form of licensing and used primarily by service firms in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business Franchising is attractive because firms can quickly build a global presence by avoiding many costs and risks of opening up a foreign market Franchising is unattractive because the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

Joint Ventures A joint venture (JV) is the establishment of a separate firm that is jointly owned by two or more firms and most JVs are 50:50 partnerships JVs are attractive because the firm may benefit from a partner's local knowledge, the shared costs and risks, and political regulations JVs are unattractive because: The firm risks losing its technology to its partner It may not have the tight control over subsidiaries to realize experience curve or location economies Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

Wholly Owned Subsidiaries In a wholly owned subsidiary (WOS), the firm has 100% ownership; it can be established by setting up a new operation (i.e., green-field investment) or by merging and acquiring (M&A) an established firm WOSs are attractive because they: Reduce the risk of losing control over core competencies Give a firm the tight control over operations in different countries necessary for global strategic coordination Realize location and experience curve economies WOSs are unattractive because of the full cost and risk of setting up overseas operations

Table 14.1 Advantages & Disadvantages of Entry Modes

Core Competencies and Entry Mode The optimal entry mode depends to some degree on the nature of a firm’s core competencies When a firm’s competitive advantage is based on proprietary technological know-how, the firm should avoid licensing and JV arrangements unless it believes its technological advantage is only transitory, or that it can establish its technology as the dominant design in the industry When a firm’s competitive advantage is based on management know-how and brand name, the risk of losing control over the management skills is not high. Such firms (e.g., McDonald’s) may favor a combination of franchising and subsidiaries (either WOS or JV)

Strategic Alliances Strategic alliances refer to cooperative agreements between potential or actual competitors and range from formal JVs to short-term contractual agreements The number of strategic alliances has exploded in recent decades

Strategic Alliances The advantages of strategic alliances: facilitate entry into a foreign market allow firms to share the fixed costs (and associated risks) of developing new products or processes bring together complementary skills and assets that neither partner could easily develop on its own can help a firm establish technological standards for the industry that will benefit the firm But, strategic alliances can give competitors low-cost routes to new technology and markets Management Focus: Cisco and Fujitsu Summary This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believes that the Japanese market will be important, and wants to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions. Suggested Discussion Questions 1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks? Discussion Points: Cisco hoped to achieve several goals through its alliance with Fujitsu. The company hoped that by sharing R&D, new product development would be quicker, that combining its technology expertise with Fujitsu’s production expertise would result in more reliable products, that it would gain a bigger sales presence in Japan, and that by bundling its routers together with Fujitsu’s telecommunications equipment, the alliance could offer end-to-end communications solutions to customers. Students will probably suggest that the biggest risk for Cisco is that by sharing its proprietary technology with Fujitsu, it could potentially create a competitor. To avoid this, Cisco will need to take steps to protect its technology by making sure that safeguards are written into alliance agreements, and ensure that it is getting an equitable gain from the agreement. 2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu? Discussion Points: One of the key attractions of an alliance with Fujitsu’s was the company’s strong presence in the Japanese market. Japan is at the forefront of second generation high speed Internet based telecommunications networks, and Cisco wanted to be a part of that market. For Fujitsu, the alliance meant that it could fill the gap in its product line for routers, reduce product development costs and time, and produce more reliable products. 3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market? Discussion Points: For other competitors in the market, the alliance between Cisco and Fujitsu is significant. Together, the companies can offer one-stop shopping end-to-end communications solutions. Furthermore, because the two companies are pooling their resources, development costs are lower, which will put additional pressure on competitors. Another Perspective:To find out more about Cisco and Fujitsu, students can visit the company web sites at {http://www.cisco.com/} and {http://www.fujitsu.com/global/}. In addition, a new release about the Cisco- Fujitsu alliance is available at {http://newsroom.cisco.com/dlls/2004/prod_120604c.html}.

Risk, Control, and Experience