International Business Fourth Edition

Entry Strategy and Strategic Alliances CHAPTER 14 Entry Strategy and Strategic Alliances

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.

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

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.

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

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

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

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.

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.

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

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.

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.

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.

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

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

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.

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.

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

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.

Partner Selection Making Alliances Work Alliance Structure

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

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

Managing the Alliance Building Trust Learning from Partners