1. Entry Strategy and Strategic Alliances
Chapter 15
Entry Strategy
and Strategic Alliances
Chapter 14: Entry Strategy and Strategic Alliances
By: Ms. Adina Malik (ALK)

2. Learning Objectives
Explain the three basic decisions that firms contemplating foreign expansion must make.
Outline the advantages and disadvantages of the different modes that firm use to enter foreign markets.
Evaluate the pros and cons of entering into strategic alliances.

3. What Are The Basic Decisions Firms Make When Expanding Globally?
Firms expanding internationally must decide:
Which markets to enter
When to enter them and on what scale
Which entry mode to use
exporting
licensing or franchising to a company in the host nation
establishing a joint venture with a local company
establishing a new wholly owned subsidiary
acquiring an established enterprise

4. What Influences The Choice Of Entry Mode?
Several factors affect the choice of entry mode including
transport costs
trade barriers
political risks
economic risks
Business risks and costs
firm strategy
The optimal mode varies by situation – what makes sense for one company might not make sense for another
E.g. General Electric’s choice of joint venture as an entry mode
The magnitude of the advantages and disadvantages associated with each entry mode is determined by these factors.
GE preferred joint venture as opposed to Greenfield investment or acquisition in order to gain local knowledge about the foreign market and share the cost of entry into a foreign market. They felt that it’s a less risky venture, particularly for a nation where they have no presence at all. However, the fact that the joint venture firms in the host country may have major strategic decision making power can be an issue of consideration.

5. Is There A “Right” Way To Enter Foreign Markets?
No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward

6. How Can Firms Enter Foreign Markets?
These are six different ways to enter a foreign market
Exporting - common first step for many manufacturing firms
later, firms may switch to another mode
Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel
at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation
Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee
patents, inventions, formulas, processes, designs, copyrights, trademarks
How should a firm enter a market?
Recall, that once a company has made the decision to expand internationally, it has to decide how to enter the market.
Should it export or establish a wholly owned subsidiary for example?
As we said earlier, sometimes companies don’t have much choice in the matter, but other times, they have more flexibility.
There are six different ways to enter a market, exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries.
Most companies begin their global expansion with exporting, and then later switch to other methods.
In some cases, turnkey projects make sense. In a turnkey project, the contractor agrees to handle all the details of the foreign project for the firm, even down to training employees.
At the end of the project, the client is handed the key to the plant that is ready to operate.
This type of arrangement is common in the chemical, pharmaceutical, petroleum refining, and metal refining industries.
Licensing is another way that companies can enter foreign markets.
When a firm enters a licensing agreement it gives the licensee the rights to intangible property for a specified period of time in exchange for royalties.
What is intangible property?
It includes things like patents, inventions, formulas, processes, designs, copyrights, and trademarks.

7. How Can Firms Enter Foreign Markets?
Franchising - a specialized form of licensing 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
used primarily by service firms
Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms
most joint ventures are 50:50 partnerships
Wholly owned subsidiary - the firm owns 100 percent of the stock
set up a new operation
acquire an established firm

8. Why Choose Exporting? Exporting is attractive because
it avoids the costs of establishing local manufacturing operations
it helps the firm achieve experience curve and location economies
Manufacturing in centralized location can help achieve substantial economies of scale from global sales volume
E.g. Sony in the TV market, Matsushita in the VCR market, Japanese automakers entered the US market, Samsung gained market share in computer memory chip

9. Why Choose Exporting? Exporting is unattractive because
there may be lower-cost manufacturing locations
high transport costs and tariffs can make it uneconomical
agents in a foreign country may not act in exporter’s best interest

10. Why Choose A Turnkey Arrangement?
Turnkey projects are attractive because
they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process
they can be less risky than conventional FDI
E.g. oil rich countries lacked petroleum refining technology

11. Why Choose A Turnkey Arrangement?
Turnkey projects are unattractive because
the firm has no long-term interest in the foreign country
the firm may create a competitor
if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors

12. Why Choose Licensing? Licensing is attractive because
the firm avoids development costs and risks associated with opening a foreign market
the firm avoids barriers to investment.
E.g. Fuji-Xerox in 1962 in Japan
the firm can capitalize on market opportunities without developing those applications itself.
E.g. Coca Cola has licensed its famous trademark to clothing manufacturers

13. Why Choose Licensing? Licensing is unattractive because
the firm doesn’t have the tight control required for realizing experience curve and location economies
the firm’s ability to coordinate strategic moves across countries is limited
proprietary (or intangible) assets could be lost
E.g. RCA Corporation once licensed its color TV technology to Japanese firms like Sony and Matsushita.
to reduce this risk, firms can use cross-licensing agreements

14. Why Choose Franchising?
Franchising is attractive because
it avoids the costs and risks of opening up a foreign market
firms can quickly build a global presence
E.g. McDonalds organizes the supply chain for its franchisees and provides management training and financial assistance.
Menu, cooking method, staffing policies, design and location.

15. Why Choose Franchising?
Franchising is unattractive because
it inhibits the firm's ability to take profits out of one country to support competitive attacks in another
the geographic distance of the firm from franchisees can make it difficult to detect poor quality

16. Why Choose Joint Ventures?
Joint ventures are attractive because
firms benefit from a local partner's knowledge of local conditions, culture, language, political systems, and business systems
the costs and risks of opening a foreign market are shared
they satisfy political considerations for market entry. E.g. Research suggests joint ventures with local partners face a low risk of being subject to nationalization or other forms of government interference.

17. Why Choose Joint Ventures?
Joint ventures are unattractive because
the firm risks giving control of its technology to its partner. E.g. Proposed joint venture between Boeing and Mitsubishi Heavy Industries to build a new wide-body jet raised fears.
the firm may not have the tight control 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

18. Why Choose A Wholly Owned Subsidiary?
Wholly owned subsidiaries are attractive because
they reduce the risk of losing control over core competencies
they give a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination
they may be required in order to realize location and experience curve economies
Wholly owned subsidiaries are unattractive because
the firm bears the full cost and risk of setting up overseas operations

19. Why Choose Acquisition?
Acquisitions are attractive because
they are quick to execute. For e.g. Daimler-Benz (Germany) acquired Chrysler (US)-DaimlerChrysler
they enable firms to preempt their competitors
they may be less risky than Greenfield ventures. For e.g. the firm buys a set of assets that are producing a known revenue and profit stream. Such case will be uncertain under Greenfield venture.
To avoid these problems, firms should
carefully screen the firm to be acquired
move rapidly to implement an integration plan

20. Why Choose Acquisition?
Acquisitions can fail when
the acquiring firm overpays for the acquired firm
the cultures of the acquiring and acquired firm clash
attempts to realize synergies run into roadblocks and take much longer than forecast. For e.g. differences in management philosophy & company culture can slow the integration of business operations.
there is inadequate pre-acquisition screening

21. Why Choose Greenfield?
The main advantage of a Greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants
But, Greenfield ventures are slower to establish
Greenfield ventures are also risky

22. Which Is Better – Greenfield or Acquisition?
The choice depends on the situation confronting the firm
A Greenfield strategy - build a subsidiary from the ground up
Greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture
An acquisition strategy – acquire an existing company
acquisition may be better when there are well-established competitors or global competitors interested in expanding

23. What Are Strategic Alliances?
Strategic alliances refer to cooperative agreements between potential or actual competitors
range from formal joint ventures to short-term contractual agreements
the number of strategic alliances has exploded in recent decades
E.g. Microsoft-Toshiba alliance, Fuji-Xerox alliance, Boeing-Mitsubishi alliance for the 787

24. Why Choose Strategic Alliances?
Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs and risks of developing new products or processes
bring together complementary skills and assets that neither partner could easily develop on its own
help a firm establish technological standards for the industry that will benefit the firm

25. Why Choose Strategic Alliances?
Strategic alliances are unattractive because they
firms can give away more than they receive. For e.g. Japanese success in the machine tool and semiconductor industries was built on US technology acquired through strategic alliances.