Chapter 14 Entry Strategy and Strategic Alliances INTERNATIONAL BUSINESS Woo Ji-hye Jo Jun-woo

Case: Diebold Began to sell ATM machines in foreign markets in 1980’s 1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebold’s total revenues Diebold decides to go it alone with local manufacturing presence for local customization Through acquisitions joint ventures Assessment(사정,평가) In the opening case, we can see how Diebold has served foreign markets. First, Diebold started with exporting, and then <As we saw in the opening case, Diebold originally exported its ATMs to foreign countries. > The company entered into distribution agreements with established multinationals such as Philips and IBM. Chap. 14 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 There’re three basic decisions that a firm contemplating(심사숙고하다) foreign expansion must make. Let’s start with the first decision, which markets to enter. Chap. 14 Entry Strategy and Strategic Alliances

Which foreign markets Favorable Unfavorable Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or private-sector debt Unfavorable Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing Ultimately, the choice must be based on an assessment of a nation’s long-run profit potential. This potential is a function of several factors, such as the economic and political factors, the size of the market, purchasing power of consumers in that market, and likely future wealth of consumers. The attractiveness of a country as a potential market for an international business depends of balancing the benefits, costs, and risks associated with doing business in that country. The potential long-run benefits bear little relationship to a nation’s current stage of economic development or political stability. Long-run benefits depend on likely future economic growth rates, and economic growth appears to be a function of a free market system and a country’s capacity for growth. In the case of Diebold, entering emerging markets such as Brazil and China made sense given the rapid growth of a middle class in these nations, their demand for banking service and the low level of ATM penetration(보급률). Chap. 14 Entry Strategy and Strategic Alliances

Timing of entry Advantages in early market entry: Disadvantages: First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs. Disadvantages: First mover disadvantage - pioneering costs. Changes in government policy. An early entry; when an international business enters a foreign market before other foreign firms. Chap. 14 Entry Strategy and Strategic Alliances

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. May lead to indigenous competitive response. Small scale entry: Time to learn about market. Reduces exposure risk. Chap. 14 Entry Strategy and Strategic Alliances

Entry modes Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Subsidiary(자회사) Firms can use six different modes to enter foreign markets. Establishing joint ventures with a host-country firm, Or setting up a new wholly owned subsidiary in the host country. Let’s check each entry mode’s advantages and disadvantages. Chap. 14 Entry Strategy and Strategic Alliances

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 Exporting has two distinct(별개의, 다른) advantages. The experience curve refers to systematic reductions in production costs that have been observed to occur over the life of a product(P.418-419, Ch12) The location economies is the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be (transportation costs and trade barriers permitting).(P417) <By manufacturing the product in a centralized location and exporting it to other national markets, the firm ay realize substantial scale economies from its global sales volume.> Particularly for firms pursuing global or transnational strategies, it may be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective and to export to the rest of the world from that location. 2 can make exporting uneconomical, particularly for bulk products. 3.The threat of tariff barriers by the host-country government can make it uneconomical and very risky. 4.When a firm delegates its marketing, sales, and service in each country where it does business to another company. Local agents often carry the products of competing firms and so have divided loyalties. (Opening case IBM) Chap. 14 Entry Strategy and Strategic Alliances

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 In a turnkey project, 파란박스 This is a means of exporting that process technology to other countries. Ex. Chemical pharmaceutical, petroleum refining, and metal refining industries. A1.The strategy is particularly useful where FDI is limited by host-government regulations. A2.In a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political and/or economic risks. Chap. 14 Entry Strategy and Strategic Alliances

licensor grants rights to 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. Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. Chap. 14 Entry Strategy and Strategic Alliances

Licensing Disadvantages: Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination Chap. 14 Entry Strategy and Strategic Alliances

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 Franchiser sells intangible property and insists on rules for operating business Chap. 14 Entry Strategy and Strategic Alliances

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 A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Ex Fuji-Xerox Chap. 14 Entry Strategy and Strategic Alliances

Wholly owned subsidiary Subsidiaries could be Greenfield investments or acquisitions 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 Acquisition(취득,획득,습득) Greenfield investments (venture); set up a new operation in the country. acquisition; acquire an established firm in the host nation and use that firm to promote its products. Bear(지니다.부담하다) Chap. 14 Entry Strategy and Strategic Alliances

Advantages and disadvantages of entry modes Chap. 14 Entry Strategy and Strategic Alliances

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 Chap. 14 Entry Strategy and Strategic Alliances

Acquisition and Green-field - pros & cons Quick to execute Preempt competitors Possibly less risky Con: Disappointing results Overpay for firm optimism 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 Chap. 14 Entry Strategy and Strategic Alliances

Acquisition or Green-field? Well-established, incumbent firms. Competitors interested in entry. embedded skills, routines, culture. Green-field No competitors Chap. 14 Entry Strategy and Strategic Alliances

Strategic Alliances 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 Disadvantages: Competitors get low cost route to technology and markets Chap. 14 Entry Strategy and Strategic Alliances

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 Chap. 14 Entry Strategy and Strategic Alliances

Structuring the alliance to reduce opportunism Chap. 14 Entry Strategy and Strategic Alliances

Managing the alliance Build trust Learning from partners Relational capital Learning from partners Diffusion of knowledge Chap. 14 Entry Strategy and Strategic Alliances