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

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

3. 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

4. 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.

5. 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.

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Advantages and disadvantages of entry modes

13. 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

14. 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

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

16. 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

17. 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

18. 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?

19. 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

20. 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

21. 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

22. 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?