CHAPTER 14

1. CHAPTER 14 Entry Strategy and Strategic Alliances

2. Learning Objectives • Which foreign markets to enter? • Early or Late Entry? • Large scale or small scale entry? • Evaluation the modes of entry • Exporting • Licensing • Turnkey Projects

3. Learning Objectives • Evaluation the modes of entry • Franchising • Joint Ventures • Wholly Owned Subsidiary • Application to selected products

4. 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.

5. Favorable benefit-cost-risk trade-off No dramatic upsurge in inflation or private sector debt. Politically stable nations. Free market systems Unfavorable Conditions Politically unstable developing nations. Speculative financial bubbles have led to excess borrowing. Mixed or command economies. Which Foreign Markets

6. Timing of Entry • First-mover advantage. • 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.

7. 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

8. 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

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

10. 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.

11. Turnkey Projects Contractor agrees to handle every detail of project for foreign client. • 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.

12. Licensing Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. • 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

13. Franchising Franchiser sells intangible property and insists on rules for operating business. • 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.

14. 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.

15. 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. Greenfield Acquisition

16. Entry Mode Advantage Disadvantage High transport costs Exporting Ability to realize location and Trade barriers experience curve economies Problems with local marketing agents Turnkey Ability to earn returns from Creating efficient competitors Lack of long-term market presence contracts process technology skills in countries where FDI is restricted Licensing Low development costs and Lack of control over technology risks Inability to realize location and experience curve economies Inability to engage in global strategic coordination Advantages and Disadvantages of Entry Modes Table 14.1a

17. Entry Mode Advantage Disadvantage Franchising Low development costs Lack of control over quality and risks Inability to engage in global strategic coordination Joint Access to local partner’s Lack of control over technology ventures knowledge Inability to engage in global strategic Sharing development costs coordination and risks Inability to realize location and Politically acceptable experience economies Wholly Protection of technology High costs and risks owned Ability to engage in global subsidiaries strategic coordination Ability to realize location and experience economies Advantages and Disadvantages of Entry Modes Table 14.1b

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