Chapter 6 Entry Strategy

Outline Basic Entry Decisions Entry Modes Strategic Alliances Merger & Acquisition Case: p426 Merrill Lynch in Japan Fuji Xerox 柯达、乐凯、富士

Operating in Japan for 35 years. First foreign securities firm in Japan. Only foreign securities firm listed on the Tokyo Stock Exchange. Analysts provide research on over 300 companies.

Why did Merrill Lynch’s initial entry into Japan meet with such limited success? What role did changing regulations play in Merrill Lynch’s 1997 investment? What remained the major impediments to Merrill Lynch in Japan? What had not changed since its initial entry? Did the new entry strategy address these impediments?

1 Basic Entry Decisions 1-1 Which markets to enter? 1-2 When to enter the markets? 1-3 What scale of entry?

1-1 Which Foreign Markets Favorable benefit-cost-risk trade-off: 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..

1-2 Timing of Entry Advantages in early market entry: First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs. Disadvantages: pioneering costs. Changes in government policy.

1-3 Scale of Entry Large scale entry Small scale entry: Strategic Commitments - a decision that has a long-term impact and is difficult to reverse. More attractive to consumers; May cause rivals to rethink market entry. May lead to indigenous competitive response. Small scale entry: Time to learn about market. Reduces exposure risk.

B company A company Entry non-entry Entry 10/10 30/0 Non-entry 0/30 0/0 B company A company Entry non-entry Entry -5/-5 50/0 Non-entry -- --

2 Entry Modes 2-1 Exporting 2-2 Licensing 2-3 Franchising 2-4 Turnkey Projects 2-5 Joint Ventures 2-6 Wholly Owned Subsidiaries non-equity or contractual arrangement Equity arrangement

2-1 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 and non-tariff barriers. Possible lack of control over marketing reps.

2-2 Licensing Advantages: Disadvantages: Reduces costs and risks of establishing enterprise. Overcomes restrictive investment barriers. Disadvantages: Lack of control. Cross-border licensing may be difficult. Creating a competitor

2-3 Franchising Advantages: Disadvantages: Reduces costs and risk of establishing enterprise. Disadvantages: May prohibit movement of profits from one country to support operations in another country. Quality control.

2-4 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.

"Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive advantage." Discuss.

2-5 Joint Ventures Advantages: Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.

2-5 Joint Ventures Disadvantages: Risk of giving control of technology to partner. May not realize experience curve or location economies Shared ownership can lead to conflict.

2-6 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.

Advantages and Disadvantages of Entry Modes Exporting Ability to realize location and High transport costs Trade barriers experience curve economies Problems with local marketing agents Turnkey Ability to earn returns from Creating efficient competitors contracts process technology skills in Lack of long-term market presence 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 Table 9.1a

Advantages and Disadvantages of Entry Modes Franchising Low development costs and Lack of control over quality 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 Table 9.1b experience economies