1. International
Business
Fourth Edition

2. Entry Strategy and Strategic Alliances
CHAPTER 14
Entry 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 unstable
developing nations.
Speculative financial
bubbles have led to
excess borrowing.
Favorable benefit-cost-risk trade-off
Politically stable nations.
Free market systems
No dramatic upsurge
in inflation or
private sector debt.
Mixed or command
economies.
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 entrant
bears that later
entrant 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.
Plus
Minus

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.
Plus
Minus

8. Entry Modes Joint Ventures Exporting Licensing Turnkey Projects
Franchising
Joint
Ventures
Wholly Owned
Subsidiaries

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 agrees
to handle every
detail of project
for foreign client.
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.

11. Licensing Advantages: Disadvantages:
Agreement where
licensor grants rights to
intangible property to another
entity for a specified period
of time in return
for royalties.
Licensing
Advantages:
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-licensing
Joint venture

12. for operating business.
Franchiser sells
intangible property
and insists on rules
for operating business.
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.

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
Greenfield
Acquisition
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.

15. Advantages and Disadvantages of Entry Modes
Exporting
Ability 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
Licensing
Low development costs and
risks
Lack of control over technology
Inability to realize location and
Inability to engage in global strategic coordination
Disadvantage
Advantage
Entry Mode
Table 14.1a

16. Advantages and Disadvantages of Entry Modes
Franchising
Low 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
Politically acceptable
Lack of control over technology
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
High costs and risks
Entry Mode
Disadvantage
Advantage
Table 14.1b

17. 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.

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 pay
too much.
2. Avoid
surprises.
3. Pick
compatible
culture.

19. Acquisition or Green-field?
Well-established,
incumbent firms.
Competitors
interested in
entry.
Acquisition
Organizationally
embedded skills,
routines,
culture. No
competitors.
Green-field

20. Strategic Alliances Advantages: Disadvantage:
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.

21. Partner Selection
Making Alliances Work
Alliance Structure

22. 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

23. 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 14.1

24. Managing the Alliance
Building
Trust
Learning
from
Partners