Entry Strategy and Strategic Alliances
Basic foreign expansion entry decisions A firm contemplating foreign expansion must make three decisions Which markets to enter When to enter these markets What is the scale of entry
Which foreign markets Favorable Unfavorable Politically stable developed and developing nations Free market systems Unfavorable Politically unstable developing nations
Timing of entry Advantages in early market entry: Disadvantages: First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Disadvantages: First mover disadvantage Changes in government policy.
Scale of entry Large scale entry Small scale entry: Strategic Commitments - a decision that has a long-term impact and is difficult to reverse. May cause rivals to rethink market entry. Small scale entry: Time to learn about market.
Entry modes Exporting Licensing Franchising Joint Ventures
Exporting Advantages: Disadvantages: Avoids cost of establishing manufacturing operations Disadvantages: May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers
Turnkey projects Advantages: Disadvantages: Less risky than conventional FDI Disadvantages: No long-term interest in the foreign country May create a competitor
Franchising Advantages: Disadvantages: Reduces costs and risk of establishing enterprise Disadvantages: Quality control
Joint Ventures Advantages: Disadvantages: Benefit from local partner’s knowledge. Shared costs/risks with partner. Disadvantages: Shared ownership can lead to conflict
Wholly owned subsidiary Subsidiaries could be Greenfield investments or acquisitions Advantages: No risk of losing technical competence to a competitor Tight control of operations. Disadvantage: Bear full cost and risk
Advantages and disadvantages of entry modes
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
Managing the alliance Build trust Learning from partners