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