Entry modes and strategy

1. Chapter
14
Entry Strategy and
Strategic Alliances

2. 14-2
Case: Diebold
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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
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3. 14-3
Basic foreign expansion entry decisions
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A firm contemplating foreign expansion must
make three decisions
Which markets to enter
When to enter these markets
What is the scale of entry
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4. 14-4
Which foreign markets

Favorable
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Politically stable developed and developing
nations
Free market systems
No dramatic upsurge in inflation or privatesector debt
Unfavorable

Politically unstable developing nations with a
mixed or command economy or where
speculative financial bubbles have led to excess
borrowing
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5. 14-5
Timing of entry

Advantages in early market entry:
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First-mover advantage.
Build sales volume.
Move down experience curve and achieve cost
advantage.
Create switching costs.
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Tie customers to your product.
Disadvantages:

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First mover disadvantage - pioneering costs.
Changes in government policy.
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6. 14-6
Scale of entry

Large scale entry
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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


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Jollibee Example
? Good or Bad? .
Small scale entry:
Time to learn about market.

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

7. 14-7
Entry modes
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Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
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8. 14-8
Exporting

Advantages:

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Avoids cost of establishing manufacturing
operations
May help achieve experience curve and location
economies
Disadvantages:
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May compete with low-cost location manufacturers
Possible high transportation costs
Tariff barriers
Possible lack of control over marketing reps

Local Agent Problems
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9. 14-9
Turnkey projects

Advantages:

Can earn a return on knowledge asset

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Earn $ on Know How
Less risky than conventional FDI
Disadvantages:
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Contractor agrees
to handle every
detail of project
for foreign client
No long-term interest in the foreign country
May create a competitor
Selling process technology may be selling
competitive advantage as well
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10. 14-10
Licensing: Advantages
Reduces development costs and risks of establishing
foreign enterprise.
 Lack capital for venture.
 Unfamiliar or politically volatile market.
 Overcomes restrictive
Agreement where
investment barriers.
licensor grants rights to
intangible property to another
 Others can develop business
entity for a specified period
of time in return
applications of intangible
for royalties.
property.

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11. 14-11
Franchising

Advantages:
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Reduces costs and risk of establishing enterprise
Disadvantages:
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
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
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12. 14-12
Joint Ventures

Advantages:
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Benefit from local partner’s knowledge.
Shared costs/risks with partner.
Reduced political risk.
Disadvantages:
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Risk giving control of technology to partner.
May not realize experience curve or location
economies.
Shared ownership can lead to conflict
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13. 14-13
Wholly owned subsidiary

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Subsidiaries could be Greenfield investments
or acquisitions
Advantages:
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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
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14. 14-14
Advantages and disadvantages of entry modes
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15. 14-15
Selecting an entry mode
Technological 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
Management Know-How
Pressure for Cost
Reduction
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Franchising, subsidiaries (wholly
owned or joint venture)
Combination of exporting and wholly
owned subsidiary
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16. 14-16
Acquisition and Green-field- pros & cons
Greenfield
Acquisition

Pro:
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


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17. 14-17
Acquisition or Green-field?
Well-established,
incumbent firms.
Competitors
interested in
entry.
Acquisition
embedded skills,
routines, culture.
Green-field
No competitors
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18. 14-18
Strategic Alliances
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Cooperative agreements between potential or actual
competitors.
Advantages:

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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
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19. 14-19
Alliances are popular
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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
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20. 14-20
Global Alliances, however, are different
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Firms join to attain world leadership
Each partner has significant strength to bring
to the alliance
A true global vision
When competing in markets not part of
alliance, they retain their own identity
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21. 14-21
Partner selection
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Get as much information as possible on the
potential partner
Collect data from informed third parties
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Former partners
Investment bankers
Former employees
Get to know the potential partner before
committing
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22. 14-22
Structuring the alliance to reduce opportunism
Fig 14.1
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23. 14-23
Characteristics of a strategic alliance
Benefits
Independence of
Participants
Technology
Products
Control
Shared
Benefits
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Ongoing
Contributions
Markets
Cooperation
14-23
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24. 14-24
Managing the alliance
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Build trust
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Relational capital
Learning from partners
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Diffusion of knowledge
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