Entry Strategy and Strategic Alliances MGRECON401 Economics of International Business and Multinationals LECTURE 8 Entry Strategy and Strategic Alliances

Lecture Focus Which markets to enter When to enter these markets What is the scale of entry What is the mode of entry

Which foreign markets Favorable Unfavorable Politically stable developed and developing nations Free market systems Stable macroeconomy Growing market for your product Unfavorable Politically unstable developing nations Mixed or command economy Unstable macroeconomy

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.

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. Reduces exposure risk.

Entry modes Exporting Turnkey Projects Licensing/Franchising Joint Ventures Wholly Owned Subsidiaries

Exporting Advantages: Disadvantages: Avoids fixed cost of establishing manufacturing operations May help reduce costs from economies of scale in production Disadvantages: May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers

Turnkey projects Advantages: Disadvantages: Contractor agrees to handle every detail of initial setup for foreign client Advantages: Can earn a return on knowledge asset Less risky than conventional FDI Disadvantages: May create a competitor Selling process technology may be selling competitive advantage as well

Licensing/Franchising 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 Unfamiliar or politically volatile market Overcomes restrictive investment barriers Ownership solves many incentive problems Disadvantages Free-rider problem

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 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

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

Acquisition and Greenfield: pros & cons Quick to execute Preempt competitors Possibly less risky Con: Disappointing results Overpay for firm due to optimism about value creation (hubris) Culture clash Problems with proposed synergies Greenfield Pro: Can build subsidiary it wants Easy to establish operating routines Con: Slow to establish Risky Preemption by aggressive competitors

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

Case: Diebold Manufacturer of ATM machines 1980’s Distribution agreement with Philips to supply foreign markets 1990 Diebold establishes joint venture with IBM 70% Diebold: supplied machines 30% IBM: supplied global marketing, sales, and service 1997: foreign sales 20% of Diebold’s total revenues Diebold forecast growing demand in China, India, Brazil Diebold bought out IBM Diebold expanded rapidly through acquisitions

Case: ING Group Top ten worldwide financial service firm Based in the Netherlands Insurance, banking, and investment products International expansion through acquisition Prompted by WTO Prompted by relaxed banking rules in the US Left acquired asset untouched, but required sales of ING products

Case: Jollibee Foods Philippine based fast-food chain Dominant market share in Philippines Cater to local Filipino taste Which markets should it enter? How should it enter? What should be its scale of entry?

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

Alliances are popular High cost of technology development Company may not have skill, money or people to go it alone Good way to learn Good way to secure access to foreign markets Host country may require some local ownership

Global Alliances, however, are different Firms join to attain world leadership Each partner has significant strength to bring to the alliance A true global vision Relationship is horizontal not vertical When competing in markets not part of alliance, they retain their own identity

Xerox and Fuji Xerox What role has Fuji Xerox played in Xerox’s global strategy? How do you expect this role to change in the future? Is Fuji Xerox a successful joint venture in 1990? How do you measure its performance? Please be as concrete and specific as possible. What were the key success factors in this alliance in the past? Do you expect these factors to change in the future?